SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

SECURITIES ACT OF 1933

Release No. 10100 / June 17, 2016

SECURITIES EXCHANGE ACT OF 1934

Release No. 78098 / June 17, 2016

INVESTMENT ADVISERS ACT OF 1940

Release No. 4431 / June 17, 2016

INVESTMENT COMPANY ACT OF 1940

Release No. 32152 / June 17, 2016

Admin. Proc. File No. 3-15446

In the Matter of

J.S. OLIVER CAPITAL

MANAGEMENT, L.P., and

IAN O. MAUSNER

OPINION OF THE COMMISSION

INVESTMENT ADVISER PROCEEDING

CEASE-AND-DESIST PROCEEDING

Grounds for Remedial Action

Antifraud violations

Compliance and recordkeeping violations

Registered investment adviser and its principal each violated the antifraud provisions by

cherry picking profitable transactions for favored accounts and failing to disclose uses of

soft dollars to their clients. Investment adviser also engaged in related compliance and

recordkeeping violations, which principal aided, abetted, and caused. Held, it is in the

public interest to bar principal from the securities industry, to revoke investment

adviser’s registration, to impose cease-and-desist orders, and to order adviser and

principal to pay disgorgement and prejudgment interest and civil money penalties.

2

APPEARANCES

Richard J. Morvillo and Andrew J. Morris of Morvillo LLP for J.S. Oliver Capital

Management, L.P., and Ian O. Mausner.

David J. Van Havermaat, John B. Bulgozdy, and Ronnie B. Lasky for the Division of

Enforcement.

Appeal filed: August 22, 2014

Last brief received: December 7, 2015

Oral argument held: March 7, 2016

I.

A law judge issued an initial decision finding that, beginning in 2008, J.S. Oliver Capital

Management, L.P., a registered investment adviser, and Ian O. Mausner, its principal, violated

the antifraud provisions1 by cherry picking profitable trades for favored accounts and by failing

to disclose four distinct uses of soft dollar commissions to their clients.2 The initial decision

ordered them to disgorge $1,376,440, found that they caused $10.9 million in harm to disfavored

clients by cherry picking, and imposed, among other sanctions, $3,040,000 and $14,975,000 in

civil money penalties on Mausner and J.S. Oliver, respectively. On appeal, J.S. Oliver and

Mausner do not challenge the findings of liability in the initial decision (including related

compliance and recordkeeping violations),3 or the industry bar, investment adviser registration

revocation, cease-and-desist, and disgorgement orders it imposed.4 Instead, they request that we

order civil money penalties no greater than disgorgement. But because the penalty statute and

our precedent do not limit our penalty determinations to a single factor or require us to peg

penalties to disgorgement, we reject Respondents’ argument. Upon our de novo review of the

record, we find J.S. Oliver and Mausner liable for the violations found in the initial decision and

1 Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a); Section 10(b) of the

Securities Exchange Act of 1934, 15 U.S.C. § 78j(b); Exchange Act Rule 10b-5, 17 C.F.R.

§ 240.10b-5; Sections 206(1), (2), and (4) of the Investment Advisers Act of 1940, 15 U.S.C.

§ 80b-6(1), (2), and (4); Advisers Act Rule 206(4)-8, 17 C.F.R. § 275.206(4)-8; see also

Advisers Act Section 207, 15 U.S.C. § 80b-7; Advisers Act Section 204, 15 U.S.C. § 80b-4;

Advisers Act Rule 204-1(a)(2), 17 C.F.R. § 275.204-1(a)(2).

2 See J.S. Oliver Capital Management, L.P., Initial Decision Release No. 649, 2014 WL

3834038 (Aug. 5, 2014).

3 See Advisers Act Section 204, 15 U.S.C. § 80b-4; Advisers Act Rule 204-2(a)(3) and (7),

17 C.F.R. § 275.204-2(a)(3) and (7); Advisers Act Section 206(4), 15 U.S.C. § 80b-6(4);

Advisers Act Rule 206(4)-7, 17 C.F.R. § 275.206(4)-7.

4 Respondents raised an evidentiary issue relating to liability in their petition for review,

but abandoned it in their briefing. And in their challenge to the civil penalties that the law judge

imposed, they suggest that the amount of disgorgement was overstated but do not ask us to

reduce it. We address these issues below.

3

impose the same sanctions ordered in it, except that we reduce the total civil penalties on

Mausner to $1,325,000, and on J.S. Oliver to $6,625,000, by imposing second-tier penalties and

eliminating penalties assessed for conduct occurring more than five years before this proceeding

began. We also reject Respondents’ argument that the proceeding before the law judge was

unconstitutional because she was not properly appointed; consistent with our precedent, we find

that the law judge was not an inferior officer required to be appointed directly by the

Commission. We base our findings on an independent review of the record, except with respect

to those findings not challenged on appeal.

II.

Although J.S. Oliver and Mausner do not challenge the law judge’s findings of liability,

our long-standing practice provides that the initial decision “ceased to have any force or effect”

when we granted Respondents’ petition for review.5 For this reason, we set forth below the facts

supporting our findings of liability and explain the legal basis for those conclusions.

A. J.S. Oliver and Mausner violated the antifraud provisions of the securities laws by

cherry picking profitable trades for favored accounts.

We agree with the initial decision’s conclusion that J.S. Oliver and Mausner violated the

antifraud provisions of the securities laws by cherry picking profitable trades for favored

accounts. “Cherry picking is a practice in which securities professionals allocate profitable

trades to a preferred account (like their own) and less profitable or unprofitable trades to a non-

preferred account (like a customer’s).”6 In this way, an investment adviser can increase the

performance of favored accounts, or at least make it more likely that they will outperform other

accounts.

One form of cherry picking involves an adviser’s allocation of block trades. When an

adviser executes a block trade at multiple prices, it may allocate the highest-price sales to

favored accounts and the lowest-price sales to disfavored accounts. An adviser can also cherry

pick by allocating profitable trades entirely to favored accounts.

1. Between June 2008 and November 2009, J.S. Oliver and Mausner systematically

allocated profitable trades to favored accounts on a disproportionate basis.

J.S. Oliver is a registered investment adviser that Mausner co-founded in 2004. Mausner

was J.S. Oliver’s chief executive officer, portfolio manager, and ultimate decision-maker.

5 See Fundamental Portfolio Advisors, Inc., Exchange Act Release No. 48177, 56 SEC

651, 2003 WL 21658248, at *13 n.44 (July 15, 2003) (citing 17 C.F.R. §§ 201.360(d) and (e)).

6 The Dratel Group, Inc., Exchange Act Release No. 77396, 2016 WL 1071560, at *1

(Mar. 17, 2016); see also SEC v. K.W. Brown & Co., 555 F. Supp. 2d 1275, 1303 (S.D. Fla.

2007) (finding that “[i]n nearly every conceivable way the cherry-picking scheme operated as a

‘device, scheme, or artifice to defraud’ and operated ‘as a fraud or deceit upon’ investors” under

Securities and Exchange Act antifraud provisions); id. at 1308-09 (finding that cherry picking

also violated Advisers Act antifraud provisions).

4

Mausner managed client accounts, as well as hedge funds, for J.S. Oliver. J.S. Oliver offered

those funds to its clients, and Mausner also invested in them.

In June 2008, Mausner launched a new hedge fund, J.S. Oliver Concentrated Growth

Fund (“CGF”), using Mausner’s seed money. Although J.S. Oliver’s other funds had not

performed well in 2007 and 2008, CGF did not share that track record, which made it easier for

Mausner to market CGF to investors. CGF’s fee structure also was more favorable to J.S. Oliver

than those of its other funds, and J.S. Oliver’s funds generally paid it higher fees than its separate

client accounts. Following CGF’s launch, Mausner aggressively promoted its performance in

mass email distributions to J.S. Oliver’s clients and others.

Mausner’s emails promoting CGF’s performance raised red flags for at least one J.S.

Oliver client. Although that client’s account followed a similar strategy to CGF, the

performance of the client’s account lagged the market. Because of the similarity in investment

strategy, the client’s principal did not understand how CGF could perform much better than the

client’s account. When pressed, Mausner provided the client with false explanations of the

disparity in account performance.

The client’s suspicions were well-founded. Mausner traded many of the same securities

in J.S. Oliver’s funds and individual accounts, and these accounts frequently participated in the

same block trades. J.S. Oliver’s written policies required that allocations of these trades be fair

and equitable, and they specifically required that trades placed together but made at various

prices on the same day be allocated among participating accounts on the basis of average cost.

But Mausner, who made or directed all allocations of these trades among J.S. Oliver accounts,

did not follow these policies.

Beginning in June 2008, Mausner systematically allocated the most profitable trades to

six favored accounts, including those of J.S. Oliver’s four hedge funds, at the expense of three

disfavored client accounts, including the accounts of an elderly widow’s trust and a non-profit

organization. Mausner did so using the order management system (“OMS”) that J.S. Oliver’s

prime broker offered. Although OMS allowed J.S. Oliver to allocate trades using predefined

schema (such as average cost), in many cases, Mausner made manual allocations, which are

much less common. Because OMS allowed Mausner to make allocations after the end of the

trading day, he could allocate trades after first-day returns (the difference between the transaction

and closing prices) were known. And where J.S. Oliver executed a block trade at multiple

prices, Mausner could use OMS to allocate the best priced trades to favored accounts and the

least favorably priced trades to disfavored accounts.

During the relevant period, J.S. Oliver’s prime broker created numerous cherry-picking

review reports addressing J.S. Oliver’s trade allocation. The prime broker generated these

reports to alert its clients, such as investment managers, to variances in how particular accounts

were treated with respect to allocations of trades in a specific security on a given day. In its

reports, J.S. Oliver’s prime broker identified more than 4,000 instances of potential cherry

picking during the relevant period. Even after the prime broker recommended to Respondents

that they allocate trades using average prices to avoid the disparities highlighted by the reports,

J.S. Oliver and Mausner continued to allocate trades in a way that generated the reports.

5

The Division of Enforcement proved that J.S. Oliver and Mausner had cherry picked

profitable trades for favored accounts through a statistical analysis prepared by Paul Glasserman,

a professor at Columbia Business School. Glasserman examined more than 23,000 equity

transactions in J.S. Oliver’s trade blotter between June 2008 and November 2009 and found

“extremely strong statistical evidence” that Mausner and J.S. Oliver had systematically allocated

a disproportionately large share of equity trades with positive first-day returns to the six favored

accounts and systematically allocated a disproportionately large share of equity trades with

negative first-day returns to the three disfavored accounts.

Glasserman found that the probability that the observed allocation of profitable and

unprofitable trades between the favored and disfavored accounts arose by chance was

approximately one in one quadrillion (i.e., 1 x 1015

). Glasserman also found that favored

accounts realized an average first-day return of positive 0.12% (on a dollar-weighted basis)

during the relevant period, while the average first-day return for disfavored accounts was

negative 1.31%, a difference of 1.43%. On an annualized basis, these numbers were positive

35% for the favored accounts and negative 96% for the disfavored accounts, a 131% disparity.

Glasserman found that the probability that the observed difference of 1.43% in first-day returns

arose due to chance was effectively zero. He also examined various alternative explanations

offered for the bias in trade allocations and difference in first-day returns and concluded that,

even after controlling for these considerations, bias and differences in first-day returns remained

at similarly high levels of statistical significance. Glasserman also determined that the favored

and disfavored accounts that were the subject of Respondents’ cherry picking made up

approximately 98% of J.S. Oliver’s total trading volume over the relevant period. Using first-

day returns, Glasserman calculated that Respondents’ biased allocation of trades caused the three

disfavored accounts to incur total losses of $10.9 million.

By cherry picking profitable trades in favor of CGF, Mausner was able to increase its

performance and attract clients based on inflated performance results. During the relevant

period, J.S. Oliver earned performance fees of $224,600 from CGF.

2. J.S. Oliver and Mausner repeatedly violated the antifraud provisions by

fraudulently allocating trades.

The Division met its burden of establishing that J.S. Oliver and Mausner violated the

antifraud provisions by cherry picking. Securities Act Section 17(a)(1) and (3)7 and Exchange

Act Section 10(b) and Rule 10b-5(a) and (c)8 each prohibit, among other things, fraudulent

7 15 U.S.C. § 77q(a)(1) and (3) (prohibiting “employ[ing] any device, scheme, or artifice to

defraud” and “engag[ing] in any transaction, practice, or course of business which operates or

would operate as a fraud or deceit upon the purchaser”).

8 15 U.S.C. § 78j(b) (making it unlawful for any person to “use or employ. . . any

manipulative or deceptive device or contrivance in contravention of such rules and regulations as

the Commission may prescribe”); 17 C.F.R. § 240.10b-5(a) and (c) (barring “employ[ing] any

device, scheme, or artifice to defraud” and “engag[ing] in any act, practice, or course of business

which operates or would operate as a fraud or deceit upon any person”).

6

conduct. Advisers Act Sections 206(1), (2), and (4)9 and Rule 206(4)-8

10 prohibit such conduct

by investment advisers, and advisers to pooled investment vehicles, respectively. Securities Act

Section 17(a)(1), Exchange Act Rule 10b-5, and Advisers Act Section 206(1) require a showing

of scienter before liability can be imposed.11

But, as relevant here, negligence is sufficient for

liability under Section 17(a)(3), Sections 206(2) and (4), and Rule 206(4)-8.12

We find that J.S. Oliver and Mausner systematically allocated trades to favored accounts

on a disproportionate basis with scienter. Scienter is “a mental state embracing intent to deceive,

manipulate, or defraud,”13

and “includes recklessness, defined as conduct that is ‘an extreme

departure from the standards of ordinary care, . . . which presents a danger of misleading buyers

or sellers that is either known to the [respondent] or is so obvious that the [respondent] must

have been aware of it.’”14

Scienter may be proven by “inference from circumstantial evidence,”

9 15 U.S.C. § 80b-6(1), (2), and (4) (making it “unlawful for any investment adviser” by

jurisdictional means “directly or indirectly—(1) to employ any device, scheme, or artifice to

defraud any client or prospective client; (2) to engage in any transaction, practice, or course of

business which operates as a fraud or deceit upon any client or prospective client; . . . or (4) to

engage in any act, practice, or course of business which is fraudulent, deceptive, or

manipulative”).

10 17 C.F.R. § 275.206(4)-8(a) (prohibiting investment advisers to pooled investment

vehicles from “engag[ing] in any act, practice, or course of business that is fraudulent, deceptive,

or manipulative with respect to any investor or prospective investor in the pooled investment

vehicle”).

11 See Aaron v. SEC, 446 U.S. 680, 697 (1980) (concluding that “the language of § 17(a)

requires scienter under § 17(a)(1)”); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 214 (1976)

(finding Rule 10b-5 and Section 10(b) require a showing of scienter for liability to attach);

Steadman v. SEC, 603 F.2d 1126, 1134 (5th Cir. 1979) (holding that scienter is required under

Section 206(1)), aff’d on other grounds, 450 U.S. 91 (1981).

12 See Aaron, 446 U.S. at 697 (observing that the language of Section 17(a)(2) and (3) does

not require scienter); SEC v. Steadman, 967 F.2d 636, 643 n.5, 647 (D.C. Cir. 1992) (observing

that “a violation of [Section] 206(2) of the Investment Advisers Act may rest on a finding of

simple negligence” and holding that “scienter is not required under [S]ection 206(4)”); see also

David Henry Disraeli, Advisers Act Release No. 2686, 2007 WL 4481515, at *9 (Dec. 21, 2007)

(“Scienter is not required for violation of a rule promulgated under Section 206(4).”), petition

denied, 334 F. App’x 334 (D.C. Cir. 2009).

13 Ernst & Ernst, 425 U.S. at 193 n.12.

14 S.W. Hatfield, CPA, Exchange Act Release No. 73763, 2014 WL 6850921, at *7 (Dec. 5,

2014) (quoting Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977)).

7

which “can be more than sufficient” to establish the requisite state of mind.15

“A company’s

scienter is imputed from that of the individuals controlling it.”16

The evidence here establishes that Mausner, and thus J.S. Oliver, acted with scienter by

deliberately defrauding customers through biased trade allocations. Mausner was the only

person at J.S. Oliver who could approve trade allocations, and he either personally made or

directed each of the allocations over the relevant 18-month period. Mausner’s actions marked a

sharp departure from J.S. Oliver’s written policy of fair trade allocation. After J.S. Oliver’s

prime broker generated potential cherry picking reports listing inconsistencies in trade

allocations, Mausner disregarded its advice to allocate trades based on average price. Instead of

selecting a pre-defined schema to allocate trades fairly, Mausner made and approved allocations

that systematically favored certain accounts, including those of the four affiliated J.S. Oliver

funds. These funds paid J.S. Oliver more in fees than individual accounts generally did. The

start of Mausner’s cherry picking also coincided with his launch of a new fund (CGF), which

Mausner initially funded. Mausner promoted CGF heavily to prospective investors based on the

inflated performance he obtained by cherry picking, and over the relevant period, J.S. Oliver

received $224,600 in performance fees from CGF. When one client asked Mausner why the

client’s account had not performed as well as CGF, although the two accounts followed similar

strategies, Mausner lied about the reason for the disparity in performance. We conclude that J.S.

Oliver and Mausner acted with scienter.17

J.S. Oliver and Mausner’s conduct also satisfies the additional statutory requirements for

liability under the antifraud provisions at issue. They acted through means of interstate

commerce as required by all provisions,18

and their misconduct, which related to the allocation of

both purchases and sales, was necessarily “in the offer or sale” and “in connection with the

purchase or sale,” of securities, as required under Securities Act Section 17(a),19

and Exchange

15

See Herman & MacLean v. Huddleston, 459 U.S. 375, 390 n.30 (1983).

16 Warwick Capital Mgmt., Inc., Advisers Act Release No. 2694, 2008 WL 149127, at *9

n.33 (Jan. 16, 2008); accord SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1096 n.16 (2d

Cir. 1992).

17 See SEC v. K.W. Brown & Co., 555 F. Supp. 2d at 1305 (concluding that defendant who

“knowingly put his interests above those of his clients by allowing” the allocation of profitable

trades to an account in which he had a personal interest acted with scienter).

18 See Securities Act Section 17(a), 15 U.S.C. § 77q(a) (prohibiting specified conduct “by

the use of any means or instruments of transportation or communication in interstate commerce

or by use of the mails”); Exchange Act Section 10, 15 U.S.C. § 78j (same with respect to conduct

“by the use of any means or instrumentality of interstate commerce or of the mails, or of any

facility of any national securities exchange”); Exchange Act Rule 10b-5, 17 C.F.R. § 240.10b-5

(same); Advisers Act Section 206, 15 U.S.C. § 80b-6 (barring delineated acts undertaken “by use

of the mails or any means or instrumentality of interstate commerce”).

19 15 U.S.C. § 77q(a).

8

Act Section 10(b) and Rule 10b-5, respectively.20

J.S. Oliver and Mausner are both investment

advisers as required for liability under Section 206 because they provided investment advice to

others for profit,21

and their misconduct was with respect to “any client or prospective client.”22

And because they made investment decisions on behalf of their hedge funds (all pooled

investment vehicles), they were investment advisers to a pooled investment vehicle, as required

for liability under Rule 206(4)-8(a).23

Although they do not now contest liability, J.S. Oliver and Mausner asserted in their

petition for review that the law judge erred because she did not admit a document providing

account returns that purportedly would have helped show they did not cherry pick. But the

exclusion of that exhibit is irrelevant because Respondents abandoned their argument in their

briefing on the merits—thus depriving the Division of the opportunity to respond—and they now

challenge only the civil money penalties that the law judge imposed. In any event, the document

that Respondents referenced in their petition does not show any flaw in Glasserman’s analysis

because it does not address the first-day results that he analyzed. It shows the performance of

only certain accounts over longer time periods, including after the close of the relevant period.

For these reasons, we conclude that J.S. Oliver and Mausner repeatedly violated the

antifraud provisions by cherry picking profitable transactions for favored accounts. Each time

that they did so, they violated the securities laws. In particular, they repeatedly employed a

deceptive device, scheme, or artifice to defraud and engaged in deceptive acts and practices

prohibited by the antifraud provisions.24

20

15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5; see also SEC v. Zandford, 535 U.S. 813, 819,

825 (2002) (holding that the “in connection with” requirement is satisfied if the “fraudulent

scheme” and securities transaction coincide).

21 Advisers Act Section 202(a)(11), 15 U.S.C. § 80b–2(a)(11) (providing statutory

definition of investment adviser, which includes “any person who, for compensation, engages in

the business of advising others . . . as to the advisability of investing in, purchasing, or selling

securities”).

22 Advisers Act Section 206, 15 U.S.C. § 80b-6 (prohibiting specified conduct by “any

investment adviser”); Advisers Act Section 206(1) and (2), 15 U.S.C. § 80b-6(1) and (2)

(providing that prohibited conduct must be with respect to “any client or prospective client”).

23 17 C.F.R. § 275.206(4)-8(a).

24 See supra notes 7-10 (excerpting language of relevant antifraud provisions). The law

judge also found that Respondents violated the antifraud provisions by failing to disclose their

cherry picking, and Respondents do not challenge this finding. Because we sanction

Respondents for their acts of cherry picking, rather than their failure to disclose it, we do not

discuss this finding herein.

9

B. J.S. Oliver and Mausner violated the antifraud provisions of the securities laws by

failing to disclose their uses of soft dollars to their clients.

We also agree with the law judge that J.S. Oliver and Mausner violated the antifraud

provisions of the securities laws by failing to disclose four separate uses of over $1.1 million in

soft dollars to their clients.

1. Between January 2009 and November 2011, J.S. Oliver and Mausner caused soft

dollars (client assets) to be used to pay expenses that benefited them without

disclosing these uses to their clients.

Between January 2009 and November 2011, J.S. Oliver and Mausner caused over $1.1

million in soft dollars to be used to pay expenses that benefited them without disclosing these

uses to their clients. Soft dollars are client assets. “Soft dollar practices are arrangements under

which products or services other than execution of securities transactions . . . are obtained by an

adviser from or through a broker in exchange for the direction by the adviser of client brokerage

transactions to the broker.”25

A limited safe harbor created by Exchange Act Section 28(e)

applies to certain payments of research and brokerage expenses.26

In early 2009, J.S. Oliver established relationships with broker-dealers that permitted the

use of soft dollars for purposes beyond the Section 28(e) safe harbor. J.S. Oliver and these

brokers agreed on commission rates for the execution of trades, and these agreed commission

rates included a soft dollar component that benefited J.S. Oliver. The brokers accrued soft

dollars for J.S. Oliver’s account that were generated from trades placed by J.S. Oliver for its

funds and client accounts. J.S. Oliver would then submit invoices to the brokers, which Mausner

approved, requesting that certain payments be made from its soft dollar accounts. Because these

payments came from client assets, amassed through higher brokerage commissions charged to

J.S. Oliver’s funds and separately managed clients than otherwise would be payable, J.S. Oliver

did not have to make the payments itself out of its own resources. As a result, the soft dollar

payments gave J.S. Oliver a motive to make more trades than necessary in order to accrue

additional soft dollars in its account.

J.S. Oliver purported to describe its uses of soft dollars in Part 2 of its Form ADV, which

was distributed to all clients, and in offering memoranda distributed to investors in the four funds

that it managed. These disclosures stated that J.S. Oliver might use soft dollars for research and

brokerage services within the scope of Section 28(e), as well as for other purposes outside the

safe harbor that they purported to describe in varying terms. But these documents did not

25

Disclosure by Investment Advisers Regarding Soft Dollar Practices, Exchange Act

Release No. 35375 (Feb. 14, 1995), 60 Fed. Reg. 9750, 9750 (Feb. 21, 1995).

26 15 U.S.C. § 78bb(e); see also Commission Guidance Regarding Client Commission

Practices Under Section 28(e) of the Securities Exchange Act of 1934, Exchange Act Release

No. 54165 (July 18, 2006), 71 Fed. Reg. 41978, 41985 (July 24, 2006) (recognizing “Congress’s

intention to provide a limited safe harbor [through Section 28(e)] for conduct that otherwise may

be a breach of fiduciary duty”).

10

disclose four ways in which J.S. Oliver was using soft dollars, including three that benefited

Mausner personally, and none of those four uses fell within Section 28(e).

First, J.S. Oliver and Mausner used soft dollars to pay $482,381 to Powerhouse Capital,

an ostensible research firm owned by a former J.S. Oliver employee, for what amounted to that

employee’s salary and a bonus for operating the soft dollar program. But J.S. Oliver did not

disclose in its Form ADV or the offering memoranda for three of its four funds that it would pay

salaries using soft dollars. And although the CGF offering memorandum identified salaries as a

potential use of soft dollars, it did not identify bonus payments or explain that J.S. Oliver would

use soft dollars to pay a former employee for management of its soft dollar program. In any

event, J.S. Oliver did not provide the CGF offering memorandum, which applied to the investors

in CGF, to all of its clients.

Second, J.S. Oliver and Mausner used soft dollars to pay $329,365 to Mausner’s former

spouse in connection with a marital settlement agreement with Mausner. Neither J.S. Oliver’s

Form ADV nor any of its offering memoranda disclosed that J.S. Oliver would use soft dollars to

satisfy Mausner’s personal obligation to his ex-wife. And to secure the payment, Mausner

directed a subordinate to fabricate an excerpt from a non-existent contract between J.S. Oliver

and Mausner’s former spouse and to provide the false document to J.S. Oliver’s broker.

Third, J.S. Oliver and Mausner caused $300,000 in soft dollars to be used to pay rent to

J.O. Samantha, a company that Mausner owned. J.O. Samantha owned the house that J.S. Oliver

used for its offices and that Mausner sometimes used as his personal residence. After Mausner

arranged for rent to be paid using soft dollars, he twice raised the rent for the property (including

retroactively) to above-market rates, and he directed that the difference between the monthly rent

payment and J.O. Samantha’s monthly mortgage obligation be deposited in his personal account.

Respondents did not disclose these uses of soft dollars in J.S. Oliver’s Form ADV or offering

memoranda. The Form ADV and offering memoranda for three funds mentioned that soft

dollars might be used for overhead (although they did not identify rent among the examples of

possible overhead expenses), and the CGF offering memorandum more specifically identified

rent as an expense that might be paid with soft dollars. But J.S. Oliver nowhere disclosed that it

would use soft dollars to pay rent to an entity that Mausner owned and controlled, that he could

set the rent unilaterally, or that he would transfer large sums to his personal account from those

payments.

Fourth, J.S. Oliver and Mausner used soft dollars to pay $40,000 to the St. Regis

Residence Club in New York City for a timeshare Mausner maintained there. Mausner used the

timeshare, among other things, to visit his family and entertain guests. J.S. Oliver and Mausner

never disclosed that they would use soft dollars to pay Mausner’s timeshare bills. Some

disclosures mentioned that J.S. Oliver would use soft dollars to reimburse travel expenses related

to conferences, and the CGF offering memorandum disclosed that soft dollars might be used for

travel and other expenses related to potential investment opportunities. But Mausner used the

timeshare for personal uses, and the record does not show that Mausner otherwise used the

timeshare consistent with J.S. Oliver’s disclosures.

11

2. Respondents violated the antifraud provisions by failing to disclose their soft

dollar uses to their clients.

We find that J.S. Oliver and Mausner violated the antifraud provisions by failing to

disclose their uses of soft dollars to their clients. Securities Act Sections 17(a)(1) and (3), as

well as Exchange Act Rules 10b-5(a) and (c), prohibit certain material misrepresentations and

omissions.27

In addition, Securities Act Section 17(a)(2),28

Exchange Act Rule 10b-5(b),29

and

Advisers Act Rule 206(4)-8(a)(1)30

each prohibit specified misrepresentations and omissions.

Advisers Act Sections 206(1), (2), and (4) also prohibit fraudulent misstatements and omissions

by investment advisers.31

27

More than half a century ago, we explained that the three main subdivisions of Section 17

and Rule 10b–5 are “mutually supporting rather than mutually exclusive.” Cady, Roberts & Co.,

Exchange Act Release No. 6668, 40 SEC 907, 1961 WL 60638, at *4 (Nov. 8, 1961). “Thus, a

breach of duty of disclosure may be viewed as a device or scheme, an implied misrepresentation,

and an act or practice, violative of all three subdivisions.” Id.; see also Mitchell H. Fillet,

Exchange Act Release No. 75054, 2015 WL 3397780, at *11 (May 27, 2015) (finding that

“Fillet’s failure to disclose was a deceptive ‘device, scheme, or artifice to defraud’ under Rule

10b-5(a) and a deceptive act that operated as a fraud on the customer under Rule 10b-5(c)”);

Dolphin & Bradbury, Inc., Exchange Act Release No. 54143, 2006 WL 1976000, at *7 (July 13,

2006) (stating that “[v]iolations of Section 17(a)(1). . . may be established by a showing that

persons acting with scienter omitted material facts in connection with securities transactions,

such that the omission rendered disclosures that were made materially false or misleading”),

petition denied, 512 F.3d 634 (D.C. Cir. 2008); cf. Chadbourne & Parke LLP v. Troice, 134 S.

Ct. 1058, 1063 (2014) (stating that Rule 10b-5 “forbids the use of any ‘device, scheme, or

artifice to defraud’ (including the making of ‘any untrue statement of a material fact’ or any

similar ‘omi[ssion]’) ‘in connection with the purchase or sale of any security”’ (alterations in

original; emphasis added)).

28 15 U.S.C. § 77q(a)(2) (prohibiting “obtain[ing] money or property by means of any

untrue statement of a material fact or any omission to state a material fact necessary in order to

make the statements made, in light of the circumstances under which they were made, not

misleading”).

29 17 C.F.R. § 240.10b-5(b) (barring any person from “mak[ing] any untrue statement of a

material fact” or “omit[ting] to state a material fact necessary . . . to make the statements made,

in the light of the circumstances under which they were made, not misleading”).

30 17 C.F.R. § 275.206(4)-8(a)(1) (barring investment advisers to pooled investment

vehicles from making same misrepresentations and omissions identified in Rule 10b-5(b) “to any

investor or prospective investor in the pooled investment vehicle”).

31 Anthony Fields, Securities Act Release No. 9727, 2015 WL 728005, at *14-15 (Feb. 20,

2015) (finding that investment adviser violated Section 206 by making material

misrepresentations and omissions); Disraeli, 2007 WL 4481515, at *8 (same); see also SEC v.

Washington Inv. Network, 475 F.3d 392, 404 (D.C. Cir. 2007) (rejecting argument that Section

206 was intended to cover “only actual misrepresentations of fact and other affirmative frauds”

(continued . . .)

12

J.S. Oliver and Mausner were under a duty to disclose their uses of soft dollars for two

reasons. First, as investment advisers, they were charged with the affirmative duty of “utmost

good faith, and full and fair disclosure of all material facts” and the obligation “to employ

reasonable care to avoid misleading” their clients through half-truths or incompletely

volunteered information.32

Respondents were under a “duty to disclose any potential conflicts of

interest accurately and completely.”33

“It is indisputable that potential conflicts of interest are

‘material’ facts with respect to clients and the Commission.”34

Soft dollars payments present

such a conflict because they are obtained from client funds but used to benefit an investment

adviser.

Second, because J.S. Oliver and Mausner purported to describe their uses of soft dollars

in Part 2 of their Form ADV, they were required to disclose facts necessary to ensure that these

statements were not misleading.35

And they were under a duty to update their statements to

ensure that they were accurate.36

For example, Advisers Act Section 204 and Rule 204-1(a)(2)

require an investment adviser to amend its Form ADV if required by the form’s instructions.37

Those instructions require prompt updates if information provided in Part 2 of Form ADV,

where J.S. Oliver described its soft dollar uses, “becomes materially inaccurate.”38

(. . . continued)

and holding that Section 206 “prohibits failures to disclose material information, not just

affirmative frauds”).

32 SEC v. Capital Gains Research Bureau, 375 U.S. 180, 191, 194 (1963); see, e.g., Conrad

P. Seghers, Advisers Act Release No. 2656, 2007 WL 2790633, at *7 & n.44 (Sept. 26, 2007),

petition denied, 548 F.3d 129 (D.C. Cir. 2008).

33 Vernazza v. SEC, 327 F.3d 851, 860 (9th Cir. 2003); see also Montford & Co., Inc.,

Advisers Act Release No. 3829, 2014 WL 1744130, at *19 (May 2, 2014) (explaining that

failure to disclose a conflict of interest is “a reckless disregard for the well-established fiduciary

duty [an investment adviser] owe[s] his clients”), petition denied, 793 F.3d 76 (D.C. Cir. 2015).

34 Vernazza, 327 F.3d at 859.

35 See, e.g., Exchange Act Rule 10b-5(b), 17 C.F.R. § 240.10b-5(b) (prohibiting omissions

“to state a material fact necessary in order to make the statements made, in the light of the

circumstances under which they were made, not misleading”).

36 See generally In re IBM Corp. Sec. Litig., 163 F.3d 102, 110 (2d Cir. 1998) (“A duty to

update may exist when a statement, reasonable at the time it is made, becomes misleading

because of a subsequent event.”).

37 15 U.S.C. § 80b-4; 17 C.F.R. § 275.204-1(a)(2).

38 See Montford, 2014 WL 1744130, at *16 (“The General Instructions for Part 2 of Form

ADV require investment advisers to promptly amend Form ADV whenever information in Part 2

becomes materially inaccurate.”).

13

J.S. Oliver and Mausner acted with scienter by omitting to disclose four distinct ways

they used over $1.1 million of soft dollars (client assets) for their own benefit.39

Three of these

uses provided Mausner with direct personal benefits. Mausner approved the requests for soft

dollar payments, and he directed the creation of a false document to ensure that a settlement

payment was made to his ex-wife. The record amply establishes that Mausner, and thus J.S.

Oliver, acted with scienter in failing to disclose the four soft dollar uses at issue.

Because each of J.S. Oliver’s and Mausner’s failures to disclose their uses of soft dollars

constitutes a separate omission of a material fact, we find that they violated the antifraud

provisions on at least four occasions. Their misconduct occurred in interstate commerce, was in

the offer or sale, and purchase and sale, of securities, and they obtained money by means of their

failure to disclose their soft dollar uses.

J.S. Oliver and Mausner also each violated Advisers Act Section 207 through their

misrepresentations and omissions in J.S. Oliver’s Form ADV. Section 207 makes it unlawful for

“any person willfully to make any untrue statement of a material fact” in Form ADV or

“willfully to omit to state . . . any material fact which is required to be stated therein.”40

Scienter

is not required for violations of Section 207.41

To find willfulness, it is sufficient that the

respondent “intentionally commit[ed] the act which constitutes the violation.”42

There is no

requirement that the respondent “also be aware” that he “violat[ed] one of the Rules or Acts.”43

J.S. Oliver’s and Mausner’s conduct meets this standard.

In addition, J.S. Oliver violated Advisers Act Section 204 and Rule 204-1(a)(2) by failing

to update its Form ADV to disclose its soft dollar uses.44

Mausner aided and abetted, and thus

39

A showing of scienter is necessary to establish violations of Exchange Act Section 10(b),

Exchange Act Rule 10b-5, Securities Act Section 17(a)(1), and Advisers Act Section 206(1),

while negligence is sufficient under Sections 17(a)(2) and (3) and Sections 206(2) and (4). See

supra notes 11 and 12.

40 See 15 U.S.C. § 80b-7 (more broadly prohibiting such misrepresentations or omissions

“in any registration application or report filed with the Commission under section 203 or 204”);

17 C.F.R. § 279.1 (providing that Form ADV is such “an application for registration”).

41 Vernazza v. SEC, 327 F.3d at 860 (explaining that, although scienter is required under

Advisers Act Section 206(1), it “is not required for the other violations of the Advisers Act” at

issue in the case, including under Section 207); see also SEC v. K.W. Brown & Co., 555 F. Supp.

2d at 1309 (observing that Section 207 is satisfied by showing of willfulness and that a “finding

of willfulness does not require intent to violate (or scienter), but merely intent to do the act which

constitutes a violation”).

42 Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (internal citation omitted).

43 Id. (internal citation omitted).

44 See supra notes 37 and 38 and associated text.

14

also caused,45

this violation because he substantially assisted J.S. Oliver’s misconduct and acted

with scienter.46

C. J.S. Oliver also violated compliance and recordkeeping requirements, and Mausner

aided, abetted, and caused these violations.

We also agree with the law judge that J.S. Oliver violated compliance and recordkeeping

requirements. Mausner aided, abetted, and caused these violations.

First, J.S. Oliver willfully violated compliance requirements imposed by Advisers Act

Section 206(4) and Rule 206(4)-7.47

Rule 206(4)-7 provides that it shall be unlawful under

Section 206(4) for a registered investment adviser, or an adviser required to be registered under

Section 203, to provide investment advice to clients unless it adopts and implements written

policies and procedures reasonably designed to prevent violation of the Advisers Act and rules

by the adviser and its supervised persons. But by cherry picking J.S. Oliver ignored and failed to

implement its written trade allocation policy. Mausner aided, abetted, and caused J.S. Oliver’s

violation because he intentionally allocated trades in violation of J.S. Oliver’s written policies.48

Second, J.S. Oliver willfully violated recordkeeping requirements. Advisers Act Section

204(a) generally provides that investment advisers “shall make and keep for prescribed periods

such records . . . , furnish such copies thereof, and make and disseminate such reports as the

Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the

45

Warwick Capital, 2008 WL 149127, at *7 n.21 (explaining that a finding that a

respondent willfully aided and abetted primary violations “necessarily makes him a ‘cause’ of

those violations” (citing Sharon M. Graham, Exchange Act Release No. 40727, 53 SEC 1072,

1998 WL 823072, at *7 n.35 (Nov. 30, 1998), aff’d, 222 F.3d 994 (D.C. Cir. 2000))); Richard D.

Chema, Exchange Act Release No. 40719, 53 SEC 1049, 1998 WL 820658, at *6 n.20 (Nov. 30,

1998) (same).

46 See Brendan E. Murray, Advisers Act Release No. 28519, 2008 WL 4964110, at *5

(Nov. 21, 2008) (setting out elements of aiding and abetting liability in administrative

proceedings as (1) an underlying violation by a primary violator, (2) substantial assistance by the

respondent, and (3) the respondent’s scienter, which may be satisfied by showing that he knew or

recklessly disregarded the wrongdoing and his role in furthering it), appeal dismissed, No. 09-79

(2d Cir. July 27, 2009); accord vFinance Invs., Inc., Exchange Act Release No. 62448, 2010 WL

2674858, at *13 (July 2, 2010) (citing Graham v. SEC, 222 F.3d at 1000).

47 15 U.S.C. § 80b-6(4); 17 C.F.R. § 275.206(4)-7; see also Compliance Programs of

Investment Companies and Investment Advisers, Advisers Act Release No. 2204 (Dec. 17,

2003), 68 Fed. Reg. 74714, 74728, 74715 n.11 (Dec. 24, 2003) (adopting Rule 206(4)-7 pursuant

to Advisers Act Sections 206(4) and 211(a) and explaining that a violation of Rule 206(4)-7

violates Section 206(4)).

48 See supra note 46.

15

protection of investors.”49

In turn, Advisers Act Rule 204-2(a) requires every registered

investment adviser or adviser required to be registered under Advisers Act Section 203 to “make

and keep true, accurate and current” specified books and records relating to its investment

advisory business, including, among other things, a “memorandum of each order given by the

investment adviser for the purchase or sale of any security” and copies of all written

communications the investment adviser sends relating to “any recommendation made or

proposed to be made and any advice given or proposed to be given.”50

J.S. Oliver willfully violated these provisions because it failed to maintain trade blotters

memorializing each order it gave for the purchase or sale of securities over at least a six-month

period and failed to maintain copies showing recipients’ addresses of emails promoting CGF’s

performance and recommending that current and prospective investors invest in it. Mausner

aided, abetted, and caused these violations. He recklessly failed to comply with J.S. Oliver’s

document retention obligations.

III.

The law judge barred Mausner from association with an investment adviser, broker,

dealer, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized

statistical rating organization (an “industry bar”); revoked J.S Oliver’s registration as an

investment adviser; entered cease-and-desist orders against each of them; ordered them jointly

and severally to disgorge $1,376,440, plus prejudgment interest; and imposed civil money

penalties of $3,040,000 on Mausner and $14,975,000 on J.S Oliver. Respondents challenge only

the civil money penalties. We generally impose the same sanctions as those imposed in the

initial decision except that we reduce the civil penalties on J.S. Oliver and Mausner to

$1,325,000 and $6,625,000, respectively; unlike the initial decision, we impose second-tier

penalties in our discretion based on the facts and circumstances present here and do not impose

penalties for conduct that occurred more than five years before the order instituting proceedings

was issued.

A. We bar Mausner from the securities industry.

We bar Mausner from the securities industry for his misconduct between 2008 and 2011.

Advisers Act Section 203(f) authorizes us to impose an industry bar on any person who, at the

time of the misconduct, was associated with an investment adviser if we find that the person

willfully violated or “aided, abetted, counseled, commanded, induced, or procured” a violation of

49

15 U.S.C. § 80b-4(a) (making requirement applicable to “[e]very investment adviser who

makes use of the mails or of any means or instrumentality of interstate commerce in connection

with his or its business as an investment adviser” other than advisers “specifically exempted

from registration” pursuant to Advisers Act Section 203(b)).

50 17 C.F.R. § 275.204-2(a)(3) and (7).

16

the securities laws and the bar is in the public interest.51

At the time of his misconduct, Mausner

was associated with J.S. Oliver, an investment adviser, and he acted willfully.52

We find that it would serve the public interest to bar Mausner from the securities

industry. In making that determination, we consider, among other things, “the egregiousness of a

respondent’s actions, the degree of scienter involved, the isolated or recurrent nature of the

infraction, the recognition of the wrongful nature of the conduct, the sincerity of any assurances

against future violations, and the likelihood that the respondent’s occupation will present

opportunities for future violations.”53

Our inquiry into the public interest “is flexible, and no

single factor is dispositive.”54

Mausner’s conduct was egregious and he acted with a high degree of scienter. Although

he was an investment adviser charged with fiduciary duties to his clients,55

Mausner persistently

and systematically failed to act in the best interests of those clients (including at least one elderly

client and a non-profit) by disproportionately allocating profitable trades to favored accounts and

using soft dollars to pay for undisclosed personal benefits, effectively stealing from clients.

Indeed, Mausner caused at least some of the soft dollar commissions to be transferred to his

personal account. Mausner also directed that a subordinate prepare and submit a fraudulent

document to a soft dollar broker so that the broker would make a settlement payment to his

former spouse. And when one client became suspicious, Mausner lied to its principal about the

reasons for the disparity in performance between its account and CGF. Mausner’s conduct was

also recurrent: Mausner continued his cherry-picking scheme, in which he made or directed each

of the many fraudulent allocations, for 18 months, and he directed the submission of the soft

dollar invoices at issue from 2009 to 2011. Although Mausner does not now contest liability, he

argued in the proceedings before the law judge that the Division had not established his liability.

On appeal, he argues only that the penalties imposed on him are excessive; he does not address

the wrongful nature of the conduct. And he has not provided any assurances against future

violations. The securities industry presents many opportunities for future violations and

Mausner’s continued employment in it in any capacity would pose an unacceptable risk to

investors.56

We find that an industry bar will protect investors from future violations by Mausner

51

15 U.S.C. § 80b-3(f) (referencing, among other provisions, Advisers Act Section

203(e)(5), (6), 15 U.S.C. § 80b-3(e)(5), (6)).

52 See supra notes 42 and 43 and accompanying text (discussing willfulness standard).

53 Robert L. Burns, Advisers Act Release No. 3260, 2011 WL 3407859, at *8 (Aug. 5,

2011) (citing Steadman v. SEC, 603 F.2d at 1140).

54 Id. (citing Geiger v. SEC, 363 F.3d 481, 488 (D.C. Cir. 2004)).

55 See supra notes 32 and 33 and accompanying text.

56 Seghers, 2007 WL 2790633, at *7 (observing that securities industry “presents continual

opportunities for [similar] dishonesty and abuse, and depends heavily on the integrity of its

participants and on investors’ confidence”); see also Charles Phillip Elliot, Exchange Act

Release No. 31202, 50 SEC 1273, 1992 WL 258850, at *3 (Sept. 17, 1992) (noting that the

industry “presents many opportunities for abuse and overreaching”), aff’d, 36 F.3d 86 (11th Cir.

1994).

17

and that his ongoing failure to disclose the use of soft dollars after the effective date of the Dodd-

Frank Act independently supports all components of an industry bar.

B. We revoke J.S. Oliver’s investment adviser registration.

We also revoke J.S. Oliver’s investment adviser registration. Advisers Act Section

203(e) authorizes us to revoke an adviser’s registration if it is in the public interest and the

adviser, or any person associated with it, has willfully violated the securities laws.57

J.S. Oliver

has done so by cherry picking, failing to disclose its soft dollar uses, and engaging in other

violations. Revocation is in the public interest for the same reasons that we impose an industry

bar on Mausner because Mausner controlled J.S. Oliver and acted through it.

C. We impose cease-and-desist orders on J.S. Oliver and Mausner.

We also find it appropriate to impose cease-and-desist orders on J.S. Oliver and Mausner.

Advisers Act Section 203(k)(1) authorizes us to impose a cease-and-desist order on any person

we find has violated or a caused a violation of the Advisers Act or rules thereunder,58

and, in this

case, Securities Act Section 8A59

and Exchange Act Section 21C60

provide for the same relief for

violations of those statutes. In determining whether a cease-and-desist order is appropriate, we

consider, among other things, the same factors used in determining whether a bar is in the public

interest. We also take into account “whether the violation is recent, the degree of harm to

investors or the marketplace resulting from the violation, and the remedial function to be served

by the cease-and-desist order in the context of any other sanctions being sought in the same

proceedings,”61

as well as the risk of future violations.62

Although “‘some’ risk is necessary, it

need not be very great to warrant issuing a cease-and-desist order.”63

“Absent evidence to the

contrary, a finding of violation raises a sufficient risk of future violation.”64

We order J.S. Oliver and Mausner to cease and desist from committing or causing

violations or future violations of the securities law provisions they violated or caused to be

violated: Securities Act Section 17(a); Exchange Act Section 10(b) and Rule 10b-5; and

Advisers Act Sections 204, 206(1), (2), and (4), and 207 and Rules 204-1(a)(2), 204-2(a)(3) and

57

15 U.S.C § 80b-3(e)(5).

58 15 U.S.C. § 80b-3(k)(1).

59 15 U.S.C. § 77h-1.

60 15 U.S.C. § 78u-3.

61 KPMG Peat Marwick LLP, Exchange Act Release No. 43862, 54 SEC 1135, 2001 WL

47245, at *26 (Jan. 19, 2001), petition denied, 289 F.3d 109 (D.C. Cir. 2002); see also Herbert

Moskowitz, Exchange Act Release No. 45609, 55 SEC 658, 2002 WL 434524, at *8 (Mar. 21,

2002).

62 KPMG Peat Marwick, 2001 WL 47245, at *26.

63 Id. at *24.

64 Id.

18

(7), 206(4)-7, and 206(4)-8. The same factors that strongly support the industry bar and

revocation orders that we impose also support cease-and-desist orders. J.S. Oliver and Mausner

violated the antifraud provisions as recently as 2011, and they caused more than $10 million in

harm to investors. The cease-and-desist orders are a crucial complement to the industry bar

because the securities laws “apply to securities transactions by any person.”65

And although we

revoke J.S. Oliver’s registration as an investment adviser, Section 206 prohibits fraud by all

advisers, not just those registered with the Commission.66

Cease-and-desist orders are “therefore

necessary to protect the public against future violations that [respondents] could commit without

being . . . associated person[s] of a broker-dealer,”67

or other entity covered by an industry bar.

Finally, we find that J.S. Oliver and Mausner’s recurrent misconduct establishes the risk of

future violations necessary to impose cease-and-desist orders.68

D. We order J.S. Oliver and Mausner to jointly and severally disgorge their ill-gotten

gains and to pay pre-judgment interest.

We also find it appropriate to order J.S. Oliver and Mausner, jointly and severally, to

disgorge $1,376,440, plus prejudgment interest. In this proceeding, Securities Act Section

8A(e), Exchange Act Section 21C(e), Advisers Act Sections 203(j) and (k)(5), and Investment

Company Act Section 9(e) all authorize us to impose disgorgement and reasonable interest.69

Disgorgement “is intended primarily to prevent unjust enrichment.”70

Although “the amount of

disgorgement should include all gains flowing from the illegal activities,” calculating that

amount “requires only a reasonable approximation of profits causally connected to the

violation.”71

“Once the Division shows that its disgorgement figure” reasonably approximates

65

See Thomas C. Bridge, Exchange Act Release No. 60736, 2009 WL 3100582, at *21

(Sept. 29, 2009) (imposing cease-and-desist order and broker-dealer bar) (internal citation

omitted), petition denied sub nom., Robles v. SEC, No. 09-1293 (D.C. Cir. Dec. 30, 2010); see

also Securities Act Section 17(a), 15 U.S.C. § 77q(a) (providing that “i[t] shall be unlawful for

any person” to engage in specified misconduct); Exchange Act Section 10, 15 U.S.C. § 78j

(same); Exchange Act Rule 10b-5 (same); Advisers Act Section 207, 15 U.S.C. § 80b-7 (same).

66 Advisers Act Section 206, 15 U.S.C. § 80b-6 (making it “unlawful for any investment

adviser” to engage in specified acts).

67 See Bridge, 2009 WL 3100582, at *21.

68 See supra notes 62-64 and accompanying text.

69 15 U.S.C. §§ 77h-1(e), 78u-3(e), 80b-3(j) and (k)(5), and 80a-9(e).

70 Zacharias v. SEC, 569 F.3d 458, 471 (D.C. Cir. 2009) (quoting SEC v. Banner Fund

Int’l, 211 F.3d 602, 617 (D.C. Cir. 2000)); see also Michael David Sweeney, Exchange Act

Release No. 29884, 50 SEC 761, 1991 WL 716756, at *5 (Oct. 30, 1991) (“[D]isgorgement is

intended to force wrongdoers to give up the amount by which they were unjustly enriched.”).

71 SEC v. JT Wallenbrock & Assocs., 440 F.3d 1109, 1113-14 (9th Cir. 2006) (quotation

omitted); see also SEC v. First City Fin. Corp., 890 F.2d 1215, 1231 (D.C. Cir. 1989) (noting

that, when calculating disgorgement, “separating legal from illegal profits exactly may at times

be a near-impossible task”).

19

the ill-gotten gains, “the burden shifts to the respondent to demonstrate that the Division’s

estimate is not a reasonable approximation.”72

Thus, “[e]xactitude is not a requirement; ‘[s]o

long as the measure of disgorgement is reasonable, any risk of uncertainty should fall on the

wrongdoer whose illegal conduct created that uncertainty.’”73

The Division’s calculation of $1,376,440 in disgorgement represents a reasonable

approximation of J.S. Oliver and Mausner’s ill-gotten gains. This is the sum of all the soft dollar

payments at issue that Respondents did not disclose to their clients ($1,151,840), plus

performance fees earned from CGF ($224,600) during the relevant period. Respondents

benefited from the undisclosed payments and obtained performance fees based on returns that

they inflated by cherry picking and used to attract investors. These gains flowed from their

misconduct.

Although J.S. Oliver and Mausner do not directly challenge the law judge’s imposition of

disgorgement, they suggest in their argument regarding civil money penalties that the

disgorgement that the law judge ordered overstates their ill-gotten gains from soft dollars. They

do not dispute that Mausner benefited directly from the payment to his former spouse, excess

rent that he deposited in his bank account, and timeshare payments. Instead, Respondents assert

that $482,381 in soft dollars went to compensate one of Mausner’s subordinates and “some of

the payments at issue, such as a portion of the rent, were earned.” We are not convinced. J.S.

Oliver and Mausner benefited from the payments to Mausner’s subordinate and any allegedly

legitimate portion of the rent and timeshare payments because J.S. Oliver and Mausner arranged

for these payments to be made from client funds using soft dollars, instead of their own

resources. We order Respondents to pay $1,376,440 in disgorgement jointly and severally,74

plus prejudgment interest.75

72

Eric J. Brown, Exchange Act Release No. 66469, 2012 WL 625874, at *15 (Feb. 27,

2012) (citing SEC v. Lorin, 76 F.3d 458, 462 (2d Cir. 2006)), petition denied sub nom., Collins v.

SEC, 736 F.3d 521 (D.C. Cir. 2013).

73 SEC v. Calvo, 378 F.3d 1211, 1217 (11th Cir. 2004) (quoting SEC v. Warde, 151 F.3d 42,

50 (2d Cir. 1998)); see also Zacharias, 569 F.3d at 473 (noting that, where disgorgement cannot

be exact, the “well-established principle is that the burden of uncertainty in calculating ill-gotten

gains falls on the wrongdoers who create that uncertainty”).

74 See SEC v. Calvo, 378 F.3d at 1215 (“It is a well settled principle that joint and several

liability is appropriate in securities laws cases where two or more individuals or entities have

close relationships in engaging in illegal conduct.”).

75 See Terence Michael Coxon, Exchange Act Release No. 48385, 56 SEC 934, 2003 WL

21991359, at *14 (Aug. 21, 2003) (“[E]xcept in the most unique and compelling circumstances,

prejudgment interest should be awarded on disgorgement, among other things, in order to deny a

wrongdoer the equivalent of an interest free loan from the wrongdoer’s victims.”), aff’d, 137 F.

App’x 975 (9th Cir. 2005).

20

E. We impose modified civil money penalties on Respondents for their acts and

omissions violating the antifraud provisions.

We also impose $1,325,000 in civil money penalties on Mausner and $6,625,000 on J.S.

Oliver for their recurrent cherry picking and multiple failures to disclose their soft dollar uses.

1. The relevant statute and law afford us discretion in determining whether to

assess civil money penalties, and if so, in setting their amount.

It is a “long-standing principle”76

that “the breadth of agency discretion is, if anything, at

[its] zenith when the action assailed relates primarily not to the issue of ascertaining whether

conduct violates the statute, or regulations, but rather to the fashioning of policies, remedies, and

sanctions . . . to arrive at maximum effectuation of Congressional objectives.”77

We have

consistently held that “the appropriateness of the sanctions imposed depends on the facts and

circumstances of the particular case and cannot be determined precisely by comparison with

action taken in other cases,”78

and the D.C. Circuit has recognized that we are “not obligated to

make [our] sanctions uniform.”79

“The employment of a sanction within the authority of an

administrative agency is thus not rendered invalid in a particular case because it is more severe

than sanctions imposed in other cases.”80

Consistent with these principles, Congress granted us considerable discretion under

Advisers Act Section 203(i) to decide in eligible cases whether to assess civil money penalties,

and if so, to determine the appropriate amount of those penalties.81

If statutory prerequisites are

met, Section 203(i) provides that we “may impose a civil penalty”82

of up to an applicable

76

AT&T v. FCC, 454 F.3d 329, 334 (D.C. Cir. 2006).

77 Fallbrook Hosp. Corp. v. NLRB, 785 F.3d 729, 735 (D.C. Cir. 2015) (quoting Niagara

Mohawk Power Corp. v. Fed. Power Comm’n, 379 F.2d 153, 159 (D.C. Cir. 1967) (footnote

omitted)).

78 Scott Epstein, Exchange Act Release No. 59328, 2009 WL 223611, at *21 n.75 (Jan. 30,

2009), petition denied, 416 F. App’x 142 (3d Cir. 2010).

79 Geiger v. SEC, 363 F.3d at 488 (declining to “compare [ordered] sanction to those

imposed in previous cases”); accord Kornman v. SEC, 592 F.3d 173, 188 (D.C. Cir. 2010); cf.

Seghers v. SEC, 548 F.3d 129, 135 (D.C. Cir. 2008) (“We accord great deference to the SEC’s

decisions as to choice of sanction, inquiring only whether a sanction was arbitrary, capricious, an

abuse of discretion, or otherwise not in accordance with law.” (internal citation omitted)).

80 Butz v. Glover Livestock Comm’n Co., 411 U.S. 182, 187 (1973).

81 15 U.S.C. § 80b-3(i); cf. Securities Act Section 8A(g), 15 U.S.C. § 77h-1(g) (similar

penalty provision applicable in certain proceedings instituted under the Securities Act);

Exchange Act Section 21B, 15 U.S.C. § 78u-2 (same with respect to Exchange Act); Investment

Company Act 9(d), 15 U.S.C. § 80a-9(d) (same with respect to Investment Company Act).

82 15 U.S.C. § 80b-3(i)(1)(A) (emphasis added).

21

statutory maximum for “each” eligible “act or omission”83

if we find that the “penalty is in the

public interest.”84

This inquiry necessarily invokes our discretion.85

To guide our discretion, Congress provided a broad, non-exclusive list of factors that we

“may consider” in determining the public interest.86

These factors include: (A) “whether the act

or omission for which such penalty is assessed involved fraud, deceit, manipulation, or deliberate

or reckless disregard of a regulatory requirement”; (B) “the harm to other persons resulting either

directly or indirectly from such act or omission”; (C) “the extent to which any person was

unjustly enriched, taking into account any restitution made to persons injured by such behavior”;

(D) specified prior findings of misconduct; and (E) “the need to deter such person and other

persons from committing such acts or omissions.”87

Congress also specified that we may

consider “such other matters as justice may require.”88

In this context, the overall penalties that we impose depend on three determinations: the

number of penalties we impose, the amount of each penalty, and the adjustments, if any, we

make for a respondent’s financial circumstances. Each of these factors is within our discretion,

although that discretion must be exercised within statutory parameters.89

First, we may impose a separate civil money penalty for each of a respondent’s “act[s] or

omission[s]” willfully violating the securities laws.90

Although Congress specified additional

83

15 U.S.C. § 80b-3(i)(2).

84 15 U.S.C. § 80b-3(i)(1)(A).

85 See Marketlines, Inc. v. SEC, 384 F.2d 264, 267 (2d Cir. 1967) (recognizing that “[i]n

charging the Commission with the enforcement of the [Advisers] Act ‘in the public interest,’

Congress necessarily gave it a broad discretion” and affirming Commission order finding that

revocation of investment adviser’s registration was in the public interest) (citing Berko v. SEC,

316 F.2d 137 (2d Cir. 1963); 2 Loss, Securities Regulation 1323 (2d ed. 1961)).

86 15 U.S.C. § 80b-3(i)(3); see also Collins v. SEC, 736 F.3d 521, 524-25 (D.C. Cir. 2013)

(recognizing that “Congress guides the Commission’s discretion by pointing to six factors” in

penalty statute).

87 Advisers Act Section 203(i)(3), 15 U.S.C. § 80b-3(i)(3).

88 Advisers Act Section 203(i)(3)(F), 15 U.S.C. § 80b-3(i)(3)(F).

89 S.W. Hatfield, CPA, 2014 WL 6850921, at *12 (“Within th[e] statutory framework, we

have discretion in setting the amount of penalty.”).

90 Advisers Act Section 203(i)(2), 15 U.S.C. § 80b-3(i)(2) (setting maximum penalties for

“each act or omission” described in Advisers Act Section 203(i)(1)); Advisers Act Section

203(i)(1)(A)(i), 15 U.S.C. § 80b-3(i)(1)(A)(i) (stating that Commission may impose a penalty in

the public interest against a person who “has willfully violated any provision of the Securities

Act of 1933, the Securities Exchange Act of 1934, [the Investment Company Act of 1934], or

[the Investment Advisers Act of 1940], or the rules or regulations thereunder”).

22

types of acts or omissions we may penalize,91

it did not define the term “act or omission” itself.92

Respondents urge us to clarify the method of counting the acts or omissions that we sanction.

They assert that we (or our law judges in non-precedential initial decisions)93

have issued

penalties that correspond to (a) units of time,94

(b) defrauded customers,95

(c) one or more

courses of conduct,96

and (d) individual transactions violating the securities laws.97

91

Advisers Act Section 203(i)(1)(A)(ii)-(iv), 15 U.S.C. § 80b-3(i)(2)(ii)-(iv) (identifying

certain secondary violations, misstatements to the Commission, and supervisory failures); see

also Advisers Act Section 203(i)(1)(B), 15 U.S.C. § 80b-3(i)(1)(B) (specifying additional acts or

omissions that can be penalized in cease-and-desist proceedings).

92 Fields, 2015 WL 728005, at *24 n.162 (noting that, although penalty statute authorizes

penalties for certain acts or omissions, it “leaves the precise unit of violation undefined”).

93 See Rapoport v. SEC, 682 F.3d 98, 105 (D.C. Cir. 2012) (recognizing that “ALJ order[s]”

are “not . . . binding” on the Commission); Absolute Potential, Inc., Exchange Act Release No.

71866, 2014 WL 1338256, at *8 n.48 (Apr. 4, 2014) (stating that the Commission is not bound

by law judge decisions).

94 See Order Making Findings and Imposing Sanctions by Default as to Centreinvest, Inc.,

Dan Rapoport, and Svyatoslav Yenin, Centreinvest, Inc., Exchange Act Release No. 60413, 2009

WL 2356790 (A.L.J. July 31, 2009), modified by Order Denying Motion to Set Aside Default

and Correcting Sanction, Exchange Act Release No. 61751, 2010 WL 1039862 (A.L.J. Mar. 22,

2010) (assessing civil money penalties for each year that violations continued), vacated by

Rapoport v. SEC, 682 F.3d at 107, 108 (vacating Commission order applying default rule but

also expressing skepticism as to law judge’s approach to penalty assessment).

95 See Brown, 2012 WL 625874, at *17; Collins v. SEC, 736 F.3d at 524 (recognizing that

in Brown we “treated each of the five relevant sales [to different customers] as ‘distinct and

separate’ acts or omissions, resulting in five penalties” and denying petition for review).

96 See Raymond J. Lucia Cos., Inc., Initial Decision Release No. 540, 2013 WL 6384274

(A.L.J. Dec. 6, 2013), superseded by Raymond J. Lucia Cos., Inc., Exchange Act Release No.

75837, 2015 WL 5172953, at *27 (Sept. 3, 2015) (Commission opinion imposing single

penalty), petition for review filed, No. 15-1345 (D.C. Cir. Oct. 5, 2015); Daniel Bogar, Initial

Decision Release No. 502, 2013 WL 3963608, at *28 (Aug. 2, 2013) (imposing civil money

penalties for two courses of action), superseded as to one respondent by Bernerd E. Young,

Exchange Act Release No. 774421, 2016 WL 1168564, at *23 (Mar. 24, 2016) (Commission

opinion imposing penalties for two subjects of misrepresentations and omissions), petition for

review filed, No. 16-1149 (D.C. Cir. May 24, 2016).

97 See optionsXpress, Inc., Initial Decision Release No. 490, 2013 WL 2471113, at *87

(June 7, 2013) (ordering respondent “to pay a civil monetary penalty in the amount of $2 million,

which is $1,667 for each of the 1,200 Reg. SHO violations” in light of determination that

ordering maximum penalties for each act or omission would have led to an “absurd result”),

pending review by the Commission, Exchange Act Release No. 70810, 2013 WL 5915774 (Nov.

5, 2013).

23

This variation in calculating the number of acts or omissions sanctioned in particular

cases is a feature of the discretion granted to us in the penalty regime that Congress created. The

securities laws prohibit a broad range of conduct that is not susceptible to a single definition. For

example, “Section 10(b) was designed as a catch-all clause to prevent fraudulent practices,”98

including not only “garden type variet[ies] of fraud” but also “unique form[s] of deception”

involving “[n]ovel or atypical methods.”99

And because conduct by an investment adviser that

violates Rule 10b-5 also violates Section 206, the reach of that section is similarly broad.100

Thus, our exact methodology for imposition of civil money penalties may vary from case to case,

as widely as the misconduct those penalties address. But that variation is rationalized by our

consistent consideration and application of the statutory parameters.101

In authorizing civil money penalties in our administrative proceedings, Congress

intended to provide us with flexibility to assess appropriate penalties on the disparate conduct

prohibited by the securities laws.102

Section 203(i) of the Advisers Act of 1940 authorizes us to

impose civil money penalties for “each” of a respondent’s “act[s] or omission[s]” willfully

violating the securities laws, including each such provision at issue here.103

Acting consistently

with this language, we have, at times, imposed separate penalties for each of a respondent’s

violative transactions.104

Federal courts also have construed the language of the penalty statute

98

Chiarella v. United States, 445 U.S. 222, 226 (1980).

99 Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 11 n.7 (1971) (internal

quotation marks omitted); see also Affiliated Ute Citizens v. United States, 406 U.S. 128, 151

(1972) (recognizing that Section 10(b) and Rule 10b-5 “are broad and, by repeated use of the

word ‘any,’ are obviously meant to be inclusive”).

100 Disraeli, 2007 WL 4481515, at *8 (“Facts showing a violation of . . . [Exchange Act

Section] 10(b) by an investment advisor will also support a showing of a Section 206 violation.”

(alteration in original) (quoting SEC v. Haligiannis, 470 F. Supp. 2d 373, 383 (S.D.N.Y. 2007))).

101 See generally Montford & Co. v. SEC, 793 F.3d 76, 84 (D.C. Cir. 2015) (affirming the

Commission’s imposition of civil money penalties where it “considered and discussed the

appropriate statutory factors in reaching its decision”).

102 H.R. Rep. No. 101-616, at 13 (1990), reprinted in 1990 U.S.C.C.A.N. 1379 (1990) (“The

principal purpose of H.R. 975, the Securities Law Enforcement Remedies Act of 1990, is to

provide the Securities and Exchange Commission (Commission) with new remedial authority

that will enable the agency to operate its enforcement program in a more flexible manner.”); id.

at 14 (“Given the disparate nature of the cases, the Commission must have a range of remedies

that enables it to act in a flexible manner.”); see also S. Rep. No. 101-337, at 11 (1990) (“In

addition to increasing deterrence, civil money penalties will provide both the courts and the SEC

with greater flexibility to tailor a remedy to the seriousness of the violation.”).

103 See supra note 90.

104 See, e.g., Guy P. Riordan, Exchange Act Release No. 61153, 2009 WL 4731397, at *22

(Dec. 11, 2009) (imposing separate civil money penalties for each violative transaction), petition

denied, 627 F.3d 1230 (D.C. Cir. 2010); Mark David Anderson, Exchange Act Release No.

48352, 56 SEC 840, 2003 WL 21953883, at *10 (Aug. 15, 2003) (ordering respondent to pay a

(continued . . .)

24

applicable in civil actions, which permits district courts to impose penalties “[f]or each violation”

of the Exchange Act,105

to authorize transactional penalties.106

Similarly, we have imposed

multiple penalties where, although respondents’ “misconduct followed a general pattern, their

acts and omissions [violating the securities laws] . . . were nevertheless distinct and separate.”107

But we also have exercised our discretion to impose only a single penalty for repeated

misconduct,108

and the penalty statute also provides flexibility to assess penalties for fewer than

each act or omission that violates the law or to assess no penalty at all.109

Our determination

does not turn on a single factor but rather looks to the factors relevant to the public interest.

(. . . continued)

separate civil money penalty for each of 96 trades at issue); New Allied Dev. Corp., Exchange

Act Release No. 37990, 52 SEC 1119, 1996 WL 683705, at *8 (Nov. 26, 1996) (imposing civil

money penalties for each misrepresentation, as well as separate penalties for each of

respondent’s unregistered sales of securities).

105 Exchange Act Section 21(d)(3)(B) (establishing maximum penalties for “each violation”

of the Exchange Act), 15 U.S.C. § 78u(d)(3)(B).

106 SEC v. Pentagon Capital Management PLC, 725 F.3d 279, 288 n.7 (2d Cir. 2013)

(finding “no error in the district court’s methodology for calculating the maximum penalty by

counting each late trade as a separate violation”), vacating on other grounds civil penalty

determination made in, No. 08 Civ. 3324(RWS), 2012 WL 1036087, at *3 (S.D.N.Y. Mar. 28,

2012) (collecting authority for the proposition that numerous courts have interpreted district

court penalty statute to permit imposing penalties “based upon the number of acts taken that

violate the securities laws”); see also SEC v. Lazare Indus., Inc., 294 F. App’x 711, 715 (3d Cir.

2008) (affirming imposition of $500,000 civil penalty because the statutes “provide for a

maximum penalty of $100,000 for individuals for each violation (i.e., each of Harley’s at least

54 sales of stock)” (emphasis in original)).

107 Brown, 2012 WL 625874, at *17; see also supra note 95 (discussing Brown).

108 See, e.g., Fields, 2015 WL 728005, at *24 n.162 (noting that “a penalty may be imposed

for ‘each act or omission,’” but accepting the parties’ implied premise that all of the respondent’s

misconduct “may be considered as one course of action” and thus “constitute[d] a single act for

purposes of assessing a civil penalty”).

109 See supra notes 82-85 and accompanying text; see also Bloomfield v. SEC, ___ F. App’x

____, 2016 WL 2343244, at *3 (9th Cir. May 4, 2016) (recognizing that “within th[e] structure

[created by Congress], the Commission is given a good deal of flexibility,” with respect to the

assessment of penalties, and sustaining penalties ordered where, although “the Commission

could have assessed a separate penalty for each of the many sales involved,” it “limited itself to

one penalty per named security”); cf. Michael v. FDIC, 687 F.3d 337, 355-56 (7th Cir. 2012)

(finding no abuse of discretion where Board affirmed ALJ’s assessment of relatively modest

civil money penalties although petitioners were eligible for penalties that “far exceeded the

amounts actually imposed”).

25

That being said, assessing penalties on the basis of a unit of time, without an explanation

of how the units of time relate to acts or omissions, may not comply with the penalty statute.110

In Rapoport, the D.C. Circuit expressed skepticism regarding a law judge’s civil penalty

determination where, although he acknowledged the need to determine “whether to treat the

entire course of conduct [at issue] as a single act or as a series of acts, as to which multiple

penalties would be appropriate,” he “imposed the maximum penalty on each respondent five

times—once for each year” during which misconduct occurred—without explaining why.111

Citing Rapoport, the law judge in this case recognized the need to “determine how many

violations occurred and how many are attributable to each person” on whom penalties are

imposed.112

And she identified some authority supporting her conclusion that “it would be

reasonable to assess a penalty for each month [a] cherry-picking scheme occurred.”113

But the

law judge did not identify an evidentiary basis to conclude that one or more “act[s] or

omission[s]” violating the securities laws occurred during each month for which she imposed a

civil penalty.114

Second, for each act or omission that we determine to sanction we may impose up to a

statutory maximum civil money penalty provided that it is consistent with the public interest.115

There are no minimum or fixed penalties. Advisers Act Section 203(i)(2) specifies three

periodically adjusted116

tiers of maximum penalties, which are applicable to increasingly serious

misconduct.117

First-tier penalties require no additional statutory showing. But before we

110

Cf. Phlo Corp., Exchange Act Release No. 55562, 2007 WL 966943, at *14 (Mar. 30,

2007) (imposing civil penalties “for each month in which [respondent] aided and abetted Phlo’s

violation of the turnaround rule,” which “generally requires that registered transfer agents

turnaround (or complete), within three business days of receipt, at least ninety percent of all

routine items received for transfer during a month” (emphasis added)).

111 682 F.3d at 108.

112 2014 WL 3834038, at *54 n.65 (citing Rapoport, 682 F.3d at 108).

113 Id. at *55 (citing K.W. Brown & Co., 555 F. Supp. 2d at 1314-15).

114 Advisers Act Section 203(i)(2), 15 U.S.C. § 80b-3(i)(2); cf. Brown, 2012 WL 625874, at

*17 (explaining that we issued separate penalties not to address “a single act that defrauded

multiple customers” but rather to sanction “separate interactions, where each customer presented

a unique opportunity to violate the securities laws”).

115 New Allied Dev. Corp., 1996 WL 683705, at *8 (observing that we may impose less than

maximum penalties for applicable tier).

116 See Debt Collection Improvement Act of 1996, Pub. L. No. 104-134, ch. 10, sec. 31001

(providing for, among other things, periodic adjustment of penalty amounts without amendment

of text of penalty statute); see also 17 C.F.R. §§ 201.1003, 1004, and 1005 (effecting adjustment

of civil money penalties for violations after, respectively, February 14, 2005, March 3, 2009, and

March 5, 2013), Tables III, IV, and V to Subpart E of Part 201 (specifying such adjusted penalty

amounts).

117 Advisers Act Section 203(i)(2)(A)-(C), 15 U.S.C. § 80b-3(i)(2)(A)-(C) (specifying three

tiers of maximum penalties).

26

impose a second-tier penalty, we must find that the misconduct we sanction “involved fraud,

deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement.”118

And we

may impose third-tier penalties only for such misconduct that also “directly or indirectly resulted

in substantial losses or created a significant risk of substantial losses to other persons or resulted

in substantial pecuniary gain to the person who committed the act or omission.”119

Within each

tier, maximum penalties for natural persons are lower than for other persons.120

In determining

what level of penalty to impose under the appropriate tier, we may consider the factors relevant

to the public interest, as well as the number of acts or omissions we chose to penalize.

Third, we also “may, in [our] discretion” consider properly submitted evidence of a

respondent’s ability to pay penalties.121

But “[e]ven when a respondent demonstrates an inability

to pay, we have discretion not to waive the penalty, . . . particularly when the misconduct is

sufficiently egregious.”122

And a respondent waives a claim of inability to pay by failing to raise

it with the law judge.123

118

Advisers Act Section 203(i)(2)(B), 15 U.S.C. § 80b-3(i)(2)(B).

119 Advisers Act Section 203(i)(2)(C), 15 U.S.C. § 80b-3(i)(2)(C).

120 Advisers Act Section 203(i)(2), 15 U.S.C. § 80b-3(i)(2).

121 Advisers Act Section 203(i)(4), 15 U.S.C. § 80b-3(i)(4) (emphasis added); Rule of

Practice 410(c), 17 C.F.R. § 201.410(c) (“Any person who files a petition for review of an initial

decision that asserts that person’s inability to pay either disgorgement, interest or a penalty shall

file with the opening brief a sworn financial disclosure statement containing the information

specified in Rule 630(b).”); Rule of Practice 630(b), 17 C.F.R. § 201.630(b) (“The financial

statement shall show the respondent’s assets, liabilities, income or other funds received and

expenses or other payments, from the date of the first violation alleged against that respondent in

the order instituting proceedings, or such later date as specified by the Commission or a hearing

officer, to the date of the order requiring the disclosure statement to be filed.”); see also Rule of

Practice 630(e), 17 C.F.R. § 201.630(e) (addressing waiver of claims of inability to pay based on

failure to file financial disclosure statement).

122 Gregory O. Trautman, Exchange Act Release No. 61167A, 2009 WL 6761741, at *24

(Dec. 15, 2009) (quoting Philip A. Lehman, Exchange Act Release No. 54660, 2006 WL

3054584, at *4 (Oct. 27, 2006) and declining to reduce penalty in light of egregiousness of

respondent’s actions).

123 Disraeli, 2007 WL 4481515, at *19.

27

2. The public interest requires stringent penalties against J.S. Oliver and

Mausner for their misconduct.

We find that it is in the public interest to impose stringent penalties against J.S. Oliver

and Mausner for their misconduct.124

We impose $1,325,000 in penalties on Mausner and

$6,625,000 on J.S. Oliver for their willful violations of the securities laws.

We start with our analysis of the public interest, an inquiry that Respondents do not

address. J.S. Oliver and Mausner engaged in fraud and deceit by cherry picking and failing to

disclose their uses of soft dollars. By cherry picking, they caused clients over $10.9 million in

first-day losses, and they also misused over $1.1 million of soft dollars (client assets).

Respondents were unjustly enriched because they used those soft dollars for purposes they did

not disclose to clients and received nearly $225,000 in fees for CGF, one of the funds that they

favored over three client accounts and promoted on the basis of inflated performance. Although

they settled an arbitration with one disfavored client, they do not attempt to show that they made

any restitution of the amounts we order disgorged.125

Moreover, although J.S. Oliver and

Mausner have no disciplinary history, their misconduct (which continued over an extended

period, i.e., June 2008 to November 2011) was serious, calculated, and grossly breached their

fiduciary duties to clients through what essentially amounted to theft. Respondents’ misconduct

also permeated nearly every aspect of their business because it involved the trading in their most

active accounts and the use of soft dollars obtained from broker commissions. And the factors

we discussed in support of our decision to impose an industry bar on Mausner also weigh heavily

in favor of a substantial penalty.126

We also find that there is a significant need for heavy penalties to deter J.S. Oliver,

Mausner, and others from engaging in cherry-picking and soft dollar violations. Congress

recognized that penalties “should be higher if the violation is of a type that is difficult to

detect.”127

Cherry picking is, by its nature, difficult to detect because an investment adviser’s

124

See Advisers Act Section 203(i)(1)(A), 15 U.S.C. § 80b-3(i)(1)(A) (authorizing us to

impose civil money penalties “[i]n any proceeding instituted pursuant to subsection (e) or (f)

against any person,” such as this one, on an appropriate showing of the public interest and

predicate acts or omissions).

125 See generally Ralph Calabro, Exchange Act Release No. 75076, 2015 WL 3439152, at

*44 n.225, *46 n.243 (May 29, 2015) (declining to adjust disgorgement and penalties where

respondent failed to show he had made restitution through settlement).

126 See supra Section III.A.

127 H.R. Rep. No. 101-616, at 21; S. Rep. No. 101-337, at 15 (“The Committee believes it is

appropriate to enable the SEC to impose a higher penalty if the violation is of a type that is

difficult to detect.”); see also Advisers Act Section 203(i)(3)(F), 15 U.S.C. § 80b-3(i)(3)(F)

(providing that, in determining the public interest, the Commission may consider “such other

matters as justice may require”); cf. SEC v. Henke, 275 F. Supp. 2d 1075, 1085 (N.D. Cal. 2003)

(noting with respect to application of district court penalty statute that “civil penalties beyond the

amount required to compensate injured investors may be appropriate in order to achieve an

(continued . . .)

28

clients cannot see how the adviser allocates block trades. It appears that Respondents assumed

that their conduct would not be discovered. They cherry picked for 18 months, and during this

period, they repeatedly put off the principal of one disfavored client when he pressed for an

explanation of the performance of the client’s disfavored account. Even after the client left J.S.

Oliver, Mausner continued cherry picking. Respondents also failed to disclose their uses of soft

dollars. By its nature, this nondisclosure was necessarily difficult to detect. It is important to

deter Respondents (notwithstanding the industry bar and revocation orders),128

and others, from

engaging in this conduct in the future.

The Division requests that, like the initial decision, we impose 18 separate maximum

third-tier penalties on each of J.S. Oliver and Mausner for their 18-month long cherry picking,

and four maximum third-tier penalties on each of them for their failures to disclose to clients four

separate uses of soft dollars. Respondents do not contend that these penalties are inconsistent

with the statute. Rather, they assert that the law judge did not comply with principles of

reasoned decision-making because she penalized Respondents’ cherry picking on a monthly

basis but imposed a separate penalty for each subject of their soft dollar omissions. Respondents

contend that the law judge should have explained in more detail her basis for imposing monthly

cherry picking penalties, why she counted the cherry picking and soft dollar violations

differently for penalty purposes, and why she did not use one of the other methods of counting

violations that the Commission or law judges have used in the past.129

We address Respondents’

arguments to the extent that they raise issues relevant to our own penalty calculations.130

Respondents’ misconduct involved repeated calculated violations of the securities laws,

and its gravity does not merit that we assess only a single penalty for an ongoing course of

conduct. Instead, we impose 15 maximum second-tier penalties on each of J.S. Oliver and

Mausner for their cherry picking, representing one penalty for each of 15 acts of cherry picking

within the five years before the OIP was issued—a number that, as discussed below, is supported

(. . . continued)

optimal level of deterrence for a crime that is difficult to detect”), aff’d, 130 F. App’x 173 (9th

Cir. 2005).

128 See supra notes 65 and 66 and accompanying text (recognizing that a person may violate

the securities laws even if he is not affiliated with an industry participant).

129 See Rapoport v. SEC, 682 F.3d at 104 (stating in the context of discussion of the

Commission’s application of its default rule that “agencies must apply their rules consistently”

and “may not depart from their precedent without explaining why”); cf. id. at 108 (addressing

civil money penalties and explaining that the Commission “must provide some meaningful

explanation for imposing sanctions”). But see supra notes 76-80 and accompanying text

(discussing deference owed to, and fact specific nature of, administrative sanctions

determinations).

130 See supra note 5 and accompanying text (recognizing that the initial decision is of no

force or effect in this appeal).

29

by the evidentiary record131

—and four maximum second-tier penalties for their omissions to

disclose the separate soft dollar uses at issue. Second-tier penalties are appropriate because

Respondents engaged in fraud.132

The record supports a finding that Respondents engaged in at least 15 separate willful

acts of cherry picking in violation of the antifraud provisions, as required to impose 15 separate

penalties under Advisers Act Section 203(i)(2)(B).133

We find that Glasserman’s expert analysis

establishes that J.S. Oliver and Mausner engaged in at least one act of cherry picking during each

month between and including June 2008 and November 2009, a total of 18 months. The

Division observes that Glasserman “offered a detailed analysis that calculated the disparity in

performance between the favored and disfavored accounts during each” of these months, which

is reflected in an exhibit to his report.134

This analysis shows significant disparities between

average monthly first-day returns in each month at issue: in 14 of the 18 months, average first-

day returns for favored accounts are positive and average first-day returns for the disfavored

accounts are negative, and in the remaining months the negative returns for the disfavored

accounts significantly exceed those of the favored accounts. Glasserman’s findings are

particularly persuasive when considered with his analysis of Mausner’s trade allocations over the

period as a whole. Indeed, Respondents do not dispute that the evidence establishes that they

131

Cf. Calabro, 2015 WL 3439152, at *46-47 (imposing a single civil money penalty on

each respondent for churning of client accounts—misconduct litigated as a course of conduct

over a discrete period, rather than individual acts or omissions).

132 15 U.S.C. § 80b-3(i)(2)(B).

133 15 U.S.C. § 80b-3(i)(2)(B) (authorizing second-tier penalties for “each . . . act or

omission” falling within scope of the provision).

134 See Exhibit 5 to Glasserman expert report. Glasserman’s expert report reflects that, in

performing this monthly analysis, he reviewed and relied on J.S. Oliver’s trade blotter in

conjunction with other evidence of securities prices. In an addendum to his report, Glasserman

also identifies certain “specific allocation audit trail report[s]” for various trade dates in the years

2008 through 2010 that he consulted. Glasserman relied on this data to provide “a narrower set

of ‘same day, same security’ transactions,” which he concluded in his report provided “further

statistical evidence of cherry-picking” beyond his analysis of the trade blotter. At oral argument,

counsel for the Division acknowledged that Glasserman did not list any audit trail reports for

July 2009 as documents consulted in his report. This does not undermine our conclusion that

Respondents engaged in at least one cherry-picking transaction in each month over the relevant

period, including July 2009. First, Glasserman did not rely on the audit trail reports in Exhibit 5

or in his principal analysis of cherry picking over the relevant period, which concluded that the

evidence “overwhelmingly” showed that Respondents engaged in cherry picking. Thus, any

“gap” in the audit trail reports is irrelevant to our determination that Respondents engaged in at

least one act of cherry-picking during the 15-month period. Second, the record separately

contains trade allocation data for July 2009, so there is not a gap in the trade data for that month.

Third, Respondents did not challenge the Division’s assertion that Exhibit 5 provides a basis to

conclude that they engaged in at least one cherry-picking trade a month during the relevant

period.

30

engaged in at least one act of cherry picking during each month of the 18-month relevant period.

By fraudulently allocating trades at least once a month, Respondents “employ[ed]” a “device,

scheme, or artifice to defraud”135

or “engage[d]” in an “act,” “transaction, practice, or course of

business which operates or would operate as a fraud or deceit”136

at least 18 times over the

relevant period. But only 15 of these 18 acts occurred within the five years before the order

instituting proceedings was issued, and, although Respondents did not raise a statute of

limitations defense,137

we exercise our discretion to limit the penalties we impose for cherry

picking to those 15 acts.138

The Division requests that we impose third-tier penalties for Respondents’ cherry picking

because it “involved fraud” and caused substantial losses of $10.9 million to the three disfavored

accounts.139

And at oral argument, counsel for Respondents twice stated that they were not

challenging the tier of the penalties that the law judge imposed. Based on our consideration of

the relevant public interest factors and the facts of this case, however, we exercise our discretion

to impose maximum second-tier penalties.140

We impose total cherry-picking penalties of

$1,055,000 on Mausner and $5,275,000 on J.S. Oliver for seven acts between September 2008

and March 2009 at applicable maximum penalties of $65,000 and $325,000 per act and eight acts

between April 2009 and November 2009 at applicable maximum penalties of $75,000 and

$375,000.141

The penalty we impose on J.S. Oliver is slightly less than half the $10.9 million in

harm it caused its clients through cherry picking, and the penalty on Mausner is lower.

Although the parties do not attempt to calculate a precise number of cherry-picking

violations, it appears from the record that the actual number of acts or omissions constituting

135

Exchange Act Rule 10b-5(a), 17 C.F.R. § 240.10b-5(a); Securities Act Section 17(a)(1),

15 U.S.C. § 77q(a)(1); Advisers Act Section 206(1), 15 U.S.C. § 80b-6(1).

136 Exchange Act Rule 10b-5(c), 17 C.F.R. § 240.10b-5(c); Securities Act Section 17(a)(3),

15 U.S.C. § 77q(a)(3); Advisers Act Section 206(2), 15 U.S.C. § 80b-6(2); see also Advisers Act

Section 206(4), 15 U.S.C. § 80b-6(4).

137 See 28 U.S.C. § 2462 (generally providing that “an action, suit or proceeding for the

enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be

entertained unless commenced within five years from the date when the claim first accrued”)

(emphasis added); Brown, 2012 WL 625874, at *17-18 (finding, where argument was raised, that

calculation of civil penalties “should not include sales to customers outside the applicable

limitations period”).

138 Cf. Canady v. SEC, 230 F.3d 362, 365 (D.C. Cir. 2000) (concluding that “it was not

arbitrary for the Commission to deem forfeited Canady’s statute of limitations defense which

was neither briefed to the ALJ nor raised in Canady’s exceptions to his decision-nor urged by

Canady at any time before the Commission’s opinion on review”).

139 Advisers Act Section 203(i)(2)(C), 15 U.S.C. § 80b-3(i)(2)(C).

140 See supra notes 124-28 and accompanying text (analyzing statutory public interest

factors).

141 See supra note 116 (referencing adjusted maximum per tier penalties).

31

cherry picking could be much greater. J.S. Oliver engaged in more than 23,000 transactions over

the relevant period, and during that time, its prime broker identified in excess of 4,000

transactions on 167 trading days as potential instances of self-dealing. The favored and

disfavored accounts that were the subject of Respondents’ cherry picking made up approximately

98% of J.S. Oliver’s total trading volume over the relevant period, and Glasserman opined that

Mausner’s misconduct “affected virtually all of J.S. Oliver’s equity trading on behalf of its

clients.” Thus, it would appear that with further analysis of trade and allocation data, we could

be justified in finding a much larger number of acts or omissions, although this alone would not

establish that a greater penalty was appropriate in the public interest. But given the record before

us and our consideration of the public interest based on all the relevant statutory factors, we

believe that the 15 instances we have identified are substantially justified for assessing maximum

second-tier penalties for cherry picking.

Given the amount of the penalties we impose for cherry-picking, we also determine in

our discretion to impose maximum second-tier penalties for each of Respondents’ four failures to

disclose a separate use of soft dollars.142

Because Advisers Act Section 203(i) specifically

authorizes us to sanction each “act or omission” violating the securities laws,143

our decision to

penalize each of Respondents’ separate failures to disclose their use of soft dollars also complies

with the statute.144

These sanctions reflect that the primary nature of Respondents’ soft dollar

misconduct was in failing to disclose separate soft dollar uses. We apply the applicable second-

tier maximum penalties for the three omissions beginning before March 3, 2009 ($65,000 and

$325,000) and the higher applicable maximum penalties ($75,000 and $375,000) for the fourth

omission that began in June 2009 (the payment to Mausner’s former spouse). For their soft

dollar violations, we thus assess additional penalties of $270,000 (three $65,000 penalties plus an

additional $75,000 penalty) on Mausner and $1,350,000 (three $325,000 penalties plus an

additional $375,000 penalty) on J.S. Oliver.

142

We are exercising our discretion with respect to penalties for soft dollar violations based

on the entirety of the facts and circumstances of this case. We can and have assessed third-tier

penalties for failure to disclose material conflicts of interest. See, e.g., Montford & Co., 2014

WL 1744130, at *25 (failure to disclose compensation); Zion Capital Mgmt., Release No.

48904A, 2003 WL 25596513, at *9 (Dec. 11, 2003) (failure to disclose conflict of interest).

143 See Advisers Act Section 203(i)(2)(B), 15 U.S.C. § 80b-3(i)(2)(B) (setting “maximum

amount of [second-tier] penalty for each such act or omission”) (emphasis added).

144 See Montford & Co, 2014 WL 1744130, at *25 (imposing two civil money penalties on

each of firm and its principal where “[o]n two separate occasions, Respondents failed to

immediately alert clients, by full and fair disclosure, of information bearing directly on their

advisory independence and critical to the clients’ investment decisions”); see also Maria T.

Giesige, Exchange Act Release No. 60000, 2009 WL 1507584, at *8 (May 29, 2009) (stating

that “Giesige made numerous and repeated misstatements and omissions to each of her

approximately fifty customers who purchased Carolina Development securities, and the

Commission has the authority to assess a penalty for each of these individual violations”).

32

We reject Respondents’ argument that imposing monthly penalties for cherry picking is

internally inconsistent with imposing a separate penalty for each use of soft dollars that

Respondents failed to disclose. Our decision to do so reflects the differing nature of

Respondents’ two types of misconduct (one centered on repeated affirmative acts and the other

on omissions), and is consistent with the flexibility authorized by Congress through the penalty

statute.145

These methods of calculation also strike a balance between ends of a spectrum.

Penalizing Respondents’ violations as two unitary course of conduct, each warranting a single

penalty, is too lenient given the gravity of their misconduct. On the other hand, in our discretion

and on the facts of this case, we decline to use a method of counting that would yield a larger

number of total penalties. As explained above, we decline to impose a separate penalty for each

cherry-picking transaction.146

And although a different method of counting soft dollar violations

might result in a greater number of penalties (e.g., counting the undisclosed payments or some

other method identified by Respondents), assuming it were consistent with the statute, we find it

unnecessary given the total amount of penalties we impose.147

In all, we assess total civil money

penalties of $1,325,000 on Mausner and $6,625,000 on J.S. Oliver for their cherry-picking acts

and soft dollar omissions. In our discretion, we do not order them to pay penalties for their other

violations of the securities laws.

J.S. Oliver and Mausner argue that imposing stringent civil money penalties is excessive

because “the record establishes that neither firm nor principal have substantial assets.” We

disagree. Respondents failed to offer the financial records required by our rules to support such

an argument.148

Congress believed that it was “appropriate that respondents have the obligation

to present evidence of their ability to pay, since they have better access to their financial records”

than we do.149

Moreover, the evidence that Respondents marshal in favor of their argument is

not persuasive. The initial decision did not conclude that they could have been forced into

bankruptcy by an earlier settlement, as they contend. Instead, it found—consistent with the

record—that Respondents threatened bankruptcy to avoid payment of the full settlement. And

Respondents’ decision to proceed pro se before the law judge and to run J.S. Oliver’s operations

out of Mausner’s one-time residence also do not establish an inability to pay. In any event, we

have the discretion to impose penalties notwithstanding a respondent’s financial circumstances,

145

See, e.g., supra notes 76-86, 88, and 102 and accompanying text (discussing flexibility in

determination of, case specific nature of, and deference due to administrative sanctions

determinations).

146 See supra paragraph following note 141.

147 See supra notes 94-97 and accompanying text (identifying various other forms of

counting).

148 See supra note 121 and accompanying text; see also Calabro, 2015 WL 3439152, at *45

n.231 (rejecting respondent’s argument that he was “financially unable to pay any level of

disgorgement or penalty” because he failed to offer the required supporting record evidence).

149 S. Rep. 101-337, at 16; accord H.R. Rep. No. 101-616, at 39.

33

and we find that J.S. Oliver and Mausner’s misconduct is egregious enough for us to have done

so here had they established their financial circumstances.150

Respondents raise one final attack on the amount of civil money penalties, which we also

reject. Citing the D.C. Circuit’s decision in Collins v. SEC, they assert that the initial decision

erred because the penalties it imposed were “out of line” with our precedent.151

They argue that

we generally impose penalties that “bear a proportional relationship to other dollar figures in a

case” and ask us to cap the amount of the penalties imposed at the amount of disgorgement we

order. Respondents’ argument fails for three reasons.

First, we reject Respondents’ request to set civil penalties at no more than disgorgement

because our “broad discretion in fashioning sanctions in the public interest cannot be strictly

cabined according to some mechanical formula.”152

Further, in Collins, the D.C. Circuit

recognized that the penalty statute “seems to demand that [we] look beyond harm to victims or

gains enjoyed by perpetrators” and “lists harm to other persons as only one of five specific

factors (plus the catch-all reference to ‘such other matters as justice may require’).”153

And

unlike the civil money penalty statutes that apply to federal court securities enforcement actions,

the penalty statute here does not authorize us to impose civil penalties equal to a respondent’s

pecuniary gain as an alternative to penalties based on acts or omissions.154

In any event, it is

reasonable for disgorgement and civil money penalties to differ because they serve different

purposes: unlike penalties, “[d]isgorgement serves to remedy securities law violations by

150

See supra note 122 and accompanying text. Citing Steadman v. SEC, 603 F.2d at 1137,

Respondents also contend that “when the Commission chooses to order the most drastic

remedies at its disposal, it has a greater burden to show with particularity the facts and policies

that support those sanctions and why less severe action would not serve to protect investors.”

But courts have rejected this burden. See, e.g., Paz Sec., Inc. v. SEC, 566 F.3d 1172, 1176 (D.C.

Cir. 2009) (citing Rizek v. SEC, 215 F.3d 157, 161 (1st Cir. 2000) (explaining Steadman says “no

more than . . . that agencies must sufficiently articulate the grounds of their decisions”)).

151 See Collins, 736 F.3d at 526 (stating that “[r]eview for whether an agency’s sanction is

‘arbitrary or capricious’ requires consideration of whether the sanction is out of line with the

agency’s decisions in other cases”). But see supra notes 79 and 80 and accompanying text

(explaining that agency is not required to make its sanctions uniform).

152 See Blinder, Robinson & Co. v. SEC, 837 F.2d 1099, 1113 (D.C. Cir. 1988); accord Paz

Sec., Inc. v. SEC, 566 F.3d at 1175.

153 See Collins, 736 F.3d at 526 (addressing parallel Exchange Act administrative penalty

provision).

154 See Advisers Act Section 209(e)(2), 15 U.S.C. § 80b-9(e)(2) (permitting district court to

set penalty at “the gross amount of pecuniary gain to [sanctioned] defendant as a result of the

violation”); Securities Act Section 20(d)(2), 15 U.S.C. § 77t(d)(2) (same); Exchange Act Section

21(d)(3)(B), 15 U.S.C. § 78u(d)(3)(B) (same); Investment Company Act Section 42(e)(2), 15

U.S.C. § 80a-41(e)(2) (same); SEC v. K.W. Brown & Co., 555 F. Supp. 2d at 1315 (imposing

civil money penalty for cherry picking equal to amount of pecuniary gain).

34

depriving violators of the fruits of their illegal conduct” and “does not serve a punitive

function.”155

Second, even if Respondents were correct that it is necessary for penalties to be

proportional to other numbers in the case because “the penalty statute’s use of a test that is multi-

factorial” makes other comparisons too difficult,156

the penalties we impose here meet that test.

The total penalties that we assess on J.S. Oliver ($6,625,000) are somewhat more than one-half

the sum of the $10.9 million in harm that Respondents caused the disfavored accounts plus the

$1,376,440 in disgorgement we order. The total penalties on Mausner ($1,325,000) are much

lower and are slightly less than disgorgement. These penalties are thus proportional to other

figures in the case, as Respondents urge. There is no “huge excess of the penalty over other

relevant dollar figures,” and thus this case is not a “stark outlier,” as Respondents claim with

respect to the initial decision.

Our penalties are also well within the range of multiples of disgorgement that the D.C.

Circuit has identified in our proceedings. In Collins, the court observed civil penalties in

administrative proceedings “ranging from roughly one-half of the disgorgement amount . . . to

about 25 times” disgorgement, but ultimately sustained a penalty imposed on an individual that

was over 100 times disgorgement.157

And as Respondents highlight, we have imposed civil

penalties where we have ordered no disgorgement at all.158

In this case, the range identified in

Collins is $688,220 to $34,411,000, and 100 times disgorgement would be $137,644,000. The

total penalties we impose on both Respondents ($7,950,000) do not approach the midpoint of the

range of one-half to 25 times disgorgement ($17,549,610).

Finally, Respondents’ assertion that we must justify every penalty imposed as consistent

with prior decisions fails because it would overrule long-standing precedent providing that

administrative sanctions are not invalid because they are “more severe than sanctions imposed in

other cases.”159

Indeed, J.S. Oliver and Mausner concede that “the Commission is not obligated

to make its sanctions uniform.”160

Although Respondents deny it, their assertion that we should

limit penalties to the amount of disgorgement would impose precisely such a requirement here.

155

See SEC v. Contorinis, 743 F.3d 296, 301 (2d Cir. 2014).

156 But see Collins, 736 F.3d at 525 (rejecting claim that penalties were inconsistent with

precedent when considered as a multiple of disgorgement where, as here, petitioner “ma[de] no

effort to hold constant the many other factors relevant to determining civil penalties” in their

comparisons to other cases).

157 See Collins, 736 F.3d at 525.

158 See, e.g., Johnny Clifton, Exchange Act Release No. 69982, 2013 WL 3487076, at *16

(July 12, 2013).

159 Butz v. Glover Livestock Comm’n Co., 411 U.S. at 187.

160 See Geiger v. SEC, 363 F.3d at 488; see also generally supra notes 76-80 and

accompanying text (discussing flexibility in administrative sanctions determinations).

35

IV.

Respondents argue that Chief ALJ Brenda P. Murray—who presided over this matter and

issued the Initial Decision—was not appointed in a manner consistent with the Appointments

Clause of the Constitution. We find that the appointment of Commission ALJs is not subject to

the requirements of the Appointments Clause.

Under the Appointments Clause, certain high-level government officials must be

appointed in particular ways: “Principal officers” must be appointed by the President (and

confirmed by the Senate), while “inferior officers” must be appointed either by the President, the

heads of departments, or the courts of law.161

The great majority of government personnel are

neither principal nor inferior officers, but rather “mere employees” whose appointments are not

restricted by the Appointments Clause.162

The Division does not dispute that Chief ALJ Murray

was not appointed by the President, the head of a department, or a court of law.163

Respondents

therefore contend that her appointment violates the Appointments Clause because, in their view,

Chief ALJ Murray should be deemed an inferior officer. The Division counters that she is an

employee and thus there was no violation of the Appointments Clause.

As we have previously explained,164

the D.C. Circuit’s decision in Landry v. FDIC

guides our resolution of this question.165

Landry held that, for purposes of the Appointments

Clause, ALJs at the Federal Deposit Insurance Corporation (“FDIC”), who oversee

administrative proceedings to remove bank executives, are employees rather than inferior

officers. Landry explained that the touchstone for determining whether adjudicators are inferior

officers is the extent to which they have the power to issue “final decisions.”166

Although ALJs

161

The Clause provides that the President “by and with the advice and consent of the Senate,

shall appoint . . . Officers of the United States . . . but the Congress may by Law vest the

Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts

of Law, or in the Heads of Departments.” U.S. Const. art. II, § 2, cl. 2.

162 Landry v. FDIC, 204 F.3d 1125, 1134 (D.C. Cir. 2000) (quoting Freytag v.

Commissioner, 501 U.S. 868, 882 (1991)); see also Buckley v. Valeo, 424 U.S. 1, 126 (1976).

163 The Commission constitutes the “head of a department” when its commissioners act

collectively. See Free Enterprise Fund v. Public Co. Accounting Oversight Bd., 561 U.S. 477,

512-13 (2010).

164 David F. Bandimere, Exchange Act Release No. 76308, 2015 WL 6575665, at *19 (Oct.

29, 2015), petition for review filed, No. 15-9586 (10th Cir. Dec. 22, 2015); Timbervest, LLC,

Advisers Act Release No. 4197, 2015 WL 5472520, at *24 (Sept. 17, 2015), petition for review

filed, No. 15-1416 (D.C. Cir. Nov. 13, 2015); Raymond J. Lucia Co., 2015 WL 5172953, at *21.

165 204 F.3d 1125 (D.C. Cir. 2000).

166 Id. at 1133-34. Respondents assert that the Commission has changed its views on this

point, having previously taken the position in Free Enterprise Fund that members of the PCAOB

were inferior officers even though they lacked authority to issue final decisions. See Brief for

the United States, Free Enterprise Fund v. Public Co. Accounting Oversight Bd., 561 U.S. 477

(2010) (No. 08-861), 2009 WL 3290435 (Oct. 13, 2009). Respondents misapprehend what was

(continued . . .)

36

at the FDIC take testimony, conduct trial-like hearings, rule on the admissibility of evidence, and

have the power to enforce compliance with discovery orders, they “can never render the decision

of the FDIC.”167

Instead, they issue only “recommended decisions,” which the FDIC Board of

Directors reviews de novo, and “[f]inal decisions are issued only by the FDIC Board.”168

The

FDIC ALJs thus function as aides who assist the Board in its duties, not officers who exercise

significant authority independent of the Board’s supervision. Because ALJs at the FDIC “have

no such powers” of “final decision,” the D.C. Circuit “conclude[d] that they are not inferior

officers.”169

The mix of duties and powers of the Commission’s ALJs are very similar to those of the

ALJs at the FDIC. Like the FDIC’s ALJs, the Commission’s ALJs conduct hearings, take

testimony, rule on admissibility of evidence, and issue subpoenas. And like the FDIC’s ALJs,

the Commission’s ALJs do not issue the final decisions that result from such proceedings. Just

as the FDIC’s ALJs issue only “recommended decisions” that are not final, the Commission’s

ALJs issue “initial decisions” that are likewise not final.170

Respondents may petition the

Commission for review of an ALJ’s initial decision,171

and it is our “longstanding practice [to]

grant[] virtually all [such] petitions for review.”172

Indeed, we are “unaware of any case in

which the Commission has declined to grant” a respondent’s timely petition for review from an

ALJ’s initial decision.173

Absent a petition, we may also choose to review a decision on our own

initiative.174

In either case, our rules expressly provide that “the initial decision [of an ALJ] shall

(. . . continued)

at issue in Free Enterprise Fund. There, it was “undisputed” that PCAOB Board members were

inferior officers, so there was no occasion to address the distinction between mere employees

and inferior officers. See id. at 29 n.8. Further, that case did not turn on the absence or presence

of adjudicative finality, because PCAOB Board members performed “enforcement or

policymaking functions.” Free Enterprise Fund, 561 U.S. at 507 n.10.

167 Landry, 204 F.3d at 1133.

168 Id.

169 Id. at 1134.

170 See Rule of Practice 360(a)(1) & (d), 17 C.F.R. § 201.360(a)(1) & (d).

171 Rule of Practice 411(b), 17 C.F.R. § 201.411(b).

172 Exchange Act Release No. 35833, 1995 WL 368865, at *80-81 (June 9, 1995). We

reiterated this policy in the context of amendments to our Rules of Practice in 2004 that

eliminated the filing of oppositions to petitions for review. We deemed such oppositions

pointless, “given that the Commission has long had a policy of granting petitions for review,

believing that there is a benefit to Commission review when a party takes exception to a

decision.” Exchange Act Release No. 48832, 2003 WL 22827684, at *13 (Nov. 23, 2003).

173 Exchange Act Release No. 33163, 1993 WL 468594, at *59 (Nov. 5, 1993).

174 Rule of Practice 411(c), 17 C.F.R. § 201.411(c); see also 15 U.S.C. § 78d-1(b) (providing

that “the Commission shall retain a discretionary right to review the action of any . . .

administrative law judge . . . upon its own initiative or upon petition”). We have sua sponte

(continued . . .)

37

not become final.”175

Even where an aggrieved person fails to file a timely petition for review of

an initial decision and we do not order review on our own initiative, our rules provide that “the

Commission will issue an order that the decision has become final,” and it becomes final only

“upon issuance of the order” by the Commission.176

Moreover, as does the FDIC, we review our ALJs’ decisions de novo.177

Upon review,

we “may affirm, reverse, modify, set aside or remand for further proceedings, in whole or in

(. . . continued)

ordered review on a number of occasions. See, e.g., MGSI Sec., Inc., Exchange Act Release No.

42717, 2000 WL 462952, at *1 (Apr. 25, 2000) (“The Commission has determined to review the

decision on its own initiative for the limited purpose described below.”); Robert I. Moses,

Exchange Act Release No. 37795, 1996 WL 580130, at *1 (Oct. 8, 1996) (“On our own motion,

we ordered a limited review of the [initial] decision . . . .”); accord Dian Min Ma, Exchange Act

Release No. 74887, 2015 WL 2088438, at *1 (May 6, 2015); Michael Lee Mendenhall,

Exchange Act Release No. 74532, 2015 WL 1247374, at *1 (Mar. 19, 2015); George C. Kern,

Jr., Exchange Act Release No. 29356, 1991 WL 284804, at *1 (June 21, 1991).

175 Rule of Practice 360(d)(1), 17 C.F.R. § 201.360(d)(1).

176 Rule of Practice 360(d)(2), 17 C.F.R. § 201.360(d)(2) (emphasis added). An initial

decision does not become final simply “on the lapse of time” for seeking review. Exchange Act

Release No. 49412, 2004 WL 503739, at *12 (Mar. 12, 2004). And any sanctions become

effective only after the date specified in the Commission’s notice of finality. Rule of Practice

360(d)(2), 17 C.F.R. § 201.360(d)(2) (“The order of finality shall state the date on which

sanctions, if any, take effect.”).

177 We do not view the fact that we accord our ALJs deference in the context of demeanor-

based credibility determinations to vest them with the type of authority that would qualify them

as inferior officers. First, as we have repeatedly made clear, we do not accept such findings

“blindly,” and we will “disregard explicit determinations of credibility” when our de novo review

of the record as a whole convinces us that a witness’s testimony is credible (or not) or that the

weight of the evidence warrants a different finding as to the ultimate facts at issue. Kenneth R.

Ward, Exchange Act Release No. 47535, 2003 WL 1447865, at *10 (Mar. 19, 2003), aff’d, 75 F.

App’x 320 (5th Cir. 2003); accord Francis V. Lorenzo, Exchange Act Release No. 74836, 2015

WL 1927763, at *10 n.32 (Apr. 29, 2015), petition for review filed, No. 15-1202 (D.C. Cir. July

1, 2015); Irfan Mohammed Amanat, Exchange Act Release No. 54708, 2006 WL 3199181, at *8

n.46 (Nov. 3, 2006), petition denied, 269 F. App’x 217 (3d Cir. 2008); see also Kay v. FCC, 396

F.3d 1184, 1189 (D.C. Cir. 2005) (“The law is settled that an agency is not required to adopt the

credibility determinations of an administrative law judge.”). Second, our practice in this regard

is no different from the FDIC’s and so does not warrant a departure from Landry. Compare

[Redacted] (Insured State Nonmember Bank), FDIC-82-73a, 1984 WL 273918, at *5 (June 18,

1984) (stating, “as a general rule,” that “the assessment of the credibility of witnesses” by the

FDIC’s ALJs is given “deference” by the FDIC) with Ramon M. Candelaria, FDIC-95-62e, 1997

WL 211341, at *3-4 (Mar. 11, 1997) (noting that the FDIC ALJ found respondent to be “entirely

credible” but rejecting respondent’s testimony “in light of the entire record”).

38

part,” any initial decision.178

And “any procedural errors” made by an ALJ in conducting the

hearing “are cured” by our “thorough, de novo review of the record.”179

We may expand the

record by “hear[ing] additional evidence” ourselves or remanding for further proceedings before

the ALJ, and may “make any findings or conclusions that in [our] judgment are proper and on

the basis of the record.”180

Respondents suggest that our ALJs are functionally comparable to, and enjoy as much

discretion as, Article III trial judges. But that is not the case. A trial judge’s factual findings are

afforded significant deference by reviewing courts, while we do not defer to our ALJs’ findings.

And although ALJs may oversee the taking and hearing of evidence, we have made clear that we

have “plenary authority over the course of [our] administrative proceedings and the rulings of

[our] law judges—both before and after the issuance of the initial decision and irrespective of

whether any party has sought relief.”181

This includes authority over all evidentiary and

discovery-related rulings. We are not limited by the record that comes to us. As explained

above, we may expand the record. The fact that our ALJs may rule initially on evidentiary

matters and discovery issues (subject to our de novo review) does not distinguish them from the

FDIC’s ALJs in Landry who have the same authority.

Respondents rely on several decisions in which district courts have found that the

Commission’s ALJs are inferior officers.182

Those decisions decline to follow the D.C. Circuit’s

reasoning in Landry and rely instead on Freytag v. Commissioner,183

in which the Supreme

Court held that a “special trial judge” of the Tax Court was an inferior officer. But we agree

with Landry’s analysis and the distinctions that the D.C. Circuit identified between ALJs and the

special trial judges at issue in Freytag.184

The greater role and powers of the special trial judges

178

Rule of Practice 411(a), 17 C.F.R. § 201.411(a); see also 5 U.S.C. § 557(b) (“On appeal

from or review of the initial decision, the agency has all the powers which it would have in

making the initial decision . . . .”).

179 Heath v. SEC, 586 F.3d 122, 142 (2d Cir. 2009); see also, e.g., Fields, 2015 WL 728005,

at *20 (“[O]ur de novo review cures any evidentiary error that the law judge may have made.”).

180 Rules of Practice 411(a), 452; 17 C.F.R. §§ 201.411(a), 452.

181 Mendenhall, 2015 WL 1247374, at *1. Further, our “ALJs’ rulings are not precedential

and are not binding on the Commission or on other ALJs.” Bandimere, 2015 WL 6575665, at

*23 n.138 (collecting cases).

182 See Ironridge Global IV, Ltd. v. SEC, No. 1:15–CV–2512–LMM, ___ F. Supp. 3d ____,

2015 WL 7273262 (N.D. Ga. Nov. 17, 2015) (appeal pending); Gray Financial Group Inc. v.

SEC, No. 15-cv-00492, ECF No. 56 (N.D. Ga. Aug. 4, 2015) (appeal pending); Duka v. SEC,

No. 15 Civ. 357(RMB)(SN), 2015 WL 4940057 (S.D.N.Y. Aug. 3, 2015) (appeal pending); Hill

v. SEC, No. 1:15–CV–1801–LMM, 2015 WL 4307088 (N.D. Ga. June 8, 2015) (appeal

pending).

183 501 U.S. 868 (1991).

184 Landry, 204 F.3d at 1133 (explaining that the special trial judges at issue in Freytag

exercised “authority . . . not matched by the ALJs”).

39

relative to Commission ALJs, in our view, makes Freytag inapposite here. First, unlike the ALJs

whose decisions are reviewed de novo, the special trial judges made factual findings to which the

Tax Court was required to defer, unless clearly erroneous.185

Second, the special trial judges

were authorized by statute to “render the [final] decisions of the Tax Court” in significant, fully-

litigated proceedings involving declaratory judgments and amounts in controversy below

$10,000.186

As discussed above, our ALJs issue initial decisions that are not final unless the

Commission takes some further action. Third, the Tax Court (and by extension the court’s

special tax judges) exercised “a portion of the judicial power of the United States,” including the

“authority to punish contempts by fine or imprisonment.”187

Commission ALJs, by contrast, do

not possess such authority.188

And while Commission ALJs may issue subpoenas to compel

compliance, they are powerless to enforce their subpoenas; the Commission must seek and then

obtain an order from a federal district court to compel compliance.189

In this respect, too, our

ALJs are akin to the FDIC’s ALJs that Landry found to be “mere employees.”190

Respondents also rely on three cases involving military judges, which are inapposite

because those judges possessed far greater powers than do our ALJs (or the FDIC’s ALJs). They

could, for example, decide “court-martial proceedings that result in the most serious sentences”

(including death, dishonorable discharge, or imprisonment);191

make conclusive determinations

about the factual sufficiency of the evidence;192

or render findings to which reviewing courts

185

See id.

186 Freytag, 501 U.S. at 882.

187 Id. at 891.

188 See Rule of Practice 180, 17 C.F.R. § 201.180. The Commission’s rules provide ALJs

with authority to punish contemptuous conduct in only the following, limited ways: If a person

engages in contemptuous conduct before the ALJ during any proceeding, the ALJ may “exclude

that person from such hearing or conference, or any portion thereof” or “summarily suspend that

person from representing others in the proceeding in which such conduct occurred for the

duration, or any portion, of the proceeding.” Id. § 201.180(a). If there are deficiencies in a

filing, a Commission ALJ “may reject, in whole or in part,” the filing, such filing “shall not be

part of the record,” and the ALJ “may direct a party to cure any deficiencies.” Id. § 201.180(b).

Finally, if a party fails to make a required filing or to cure a deficiency with a filing, then a

Commission ALJ “may enter a default . . . , dismiss the case, decide the particular matter at issue

against that person, or prohibit the introduction of evidence or exclude testimony concerning that

matter.” Id. § 201.180(c). Any such ruling would, of course, be subject to de novo Commission

review.

189 See 15 U.S.C. § 78u(c).

190 See 12 C.F.R. §§ 308.25(h), 308.26(c), 308.34(c) (providing that an aggrieved party must

apply to a federal district court for enforcement of a subpoena issued by a FDIC ALJ).

191 Edmond v. United States, 520 U.S. 651, 652 (1997).

192 Weiss v. United States, 510 U.S. 163, 168 (1994); 10 U.S.C. § 867(c).

40

were required to defer.193

In short, not all judges possess the same stature or exercise the same

powers, and that the Commission’s ALJs may carry out some of the same tasks as other officials

who also are denominated “judges” does not mean they have the requisite significant authority to

qualify as inferior officers.

Based on the foregoing, we conclude that the mix of duties and powers of our ALJs is

similar in all material respects to the duties and role of the FDIC’s ALJs in Landry.194

Accordingly, we follow Landry, and we conclude that our ALJs are not “inferior officers” under

the Appointments Clause.195

An appropriate order will issue.196

By the Commission (Chair WHITE and Commissioners STEIN and PIWOWAR).

Brent J. Fields

Secretary

193

Ryder v. United States, 515 U.S. 177, 187 (1995).

194 We do not find any relevance in the fact that the federal securities laws and our

regulations at times refer to ALJs as “officers” or “hearing officers.” There is no indication that

Congress intended “officers” or “hearing officers” to be synonymous with “Officers of the

United States,” U.S. Const. art. II, § 2, cl. 2, and the word “officer” in our regulations has no

such meaning. We also note in this regard that the Administrative Procedure Act “consistently

uses the term ‘officer’ or the term ‘officer, employee, or agent’” to “refer to [agency] staff

members.” Kenneth Culp Davis, Separation of Functions in Administrative Agencies, 61 HARV.

L. REV. 612, 615 & n.11 (1948). Cf. 5 U.S.C. §§ 556, 557 (referring to the individual who

presides over a hearing as the “presiding employee”).

195 Beyond Landry, we believe that our ALJs are properly deemed employees (rather than

inferior officers) because this is how Congress has chosen to classify them, and that decision is

entitled to considerable deference. See Burnap v. United States, 252 U.S. 512, 516 (1920). For

example, as we discussed above, Congress created and placed ALJ positions within the

competitive service system, just like most other federal employees. Like such other employees,

an ALJ who believes that his employing agency has engaged in a prohibited personnel practice

can seek redress either through the Office of Special Counsel or the Merit Systems Protection

Board. See 5 U.S.C. §§ 1204, 1212, 1214, 1215, 1221. And ALJs—like other employees—are

subject to reductions-in-force. See id. § 7521(b).

196 We have considered all of the parties’ contentions. We have rejected or sustained them

to the extent that they are inconsistent or in accord with the views expressed in this opinion.

UNITED STATES OF AMERICA

before the

SECURITIES AND EXCHANGE COMMISSION

SECURITIES ACT OF 1933

Release No. 10100 / June 17, 2016

SECURITIES EXCHANGE ACT OF 1934

Release No. 78098 / June 17, 2016

INVESTMENT ADVISERS ACT OF 1940

Release No. 4431 / June 17, 2016

INVESTMENT COMPANY ACT OF 1940

Release No. 32152 / June 17, 2016

Admin. Proc. File No. 3-15446

In the Matter of

J.S. OLIVER CAPITAL

MANAGEMENT, L.P., and

IAN O. MAUSNER

ORDER IMPOSING REMEDIAL SANCTIONS

On the basis of the Commission’s opinion issued this day, it is

ORDERED that Ian O. Mausner (“Mausner”) be, and hereby is, barred from association

with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor,

transfer agent, or nationally recognized statistical rating organization; and it is further

ORDERED that the investment adviser registration of J.S. Oliver Capital Management,

L.P. (“J.S. Oliver”), be, and it hereby is, revoked; and it is further

ORDERED that J.S. Oliver and Mausner cease and desist from committing or causing

any violations or future violations of Section 17(a) of the Securities Act of 1933; Section 10(b)

of the Exchange Act of 1934 and Rule 10b-5 thereunder; and Sections 204, 206(1), (2), and (4),

and 207 of the Investment Advisers Act of 1940 and Rules 204-1(a)(2), 204-2(a)(3) and (7),

206(4)-7, and 206(4)-8 thereunder; and it is further

ORDERED that J.S. Oliver and Mausner disgorge $1,376,440 for their cherry-picking

and soft dollar violations, as identified in our opinion finding liability in this matter, plus

prejudgment interest of $200,794.87, such prejudgment interest calculated beginning from

2

November 1, 2011, with such interest continuing to accrue on all funds owed until they are paid,

in accordance with Commission Rule of Practice 600, 17 C.F.R. § 201.600; and it is further

ORDERED that Mausner pay civil money penalties of $1,325,000; and it is further

ORDERED that J.S. Oliver pay civil money penalties of $6,625,000.

Payment of the amounts to be disgorged and the civil money penalties shall be: (i) made

by United States postal money order, certified check, bank cashier’s check, or bank money order;

(ii) made payable to the Securities and Exchange Commission; (iii) mailed to Enterprises

Services Center, Accounts Receivable Branch, HQ Bldg., Room 181, 6500 South MacArthur

Blvd., Oklahoma City, OK 73169; and (iv) submitted under cover letter that identifies the

respondent and the file number of this proceeding.

By the Commission.

Brent J. Fields

Secretary